2. PRESENTATION OUTLINE
Meaning of Global Finance Crisis
Over view of Global Finance crisis
Underline Factors.
Consequences
- U.S.A
- UK
Indian perspective:
Consequences,Measures to curb, Lesson Learnt.
2
3. GLOBAL FINANCIAL CRISIS
The global financial crisis of 2008 is the
worst of its kind since the Great Depression
Began with failures of large financial
institutions in the United States
Morgan Stanley, Goldman Sachs, Merrill Lynch
Deutsche Bank ,Barclays.
Rapidly evolved into a global crisis resulting in a
number of European bank failures
3
4. MEANING OF GLOBAL FINANCIAL CRISIS
The term financial crisis is applied broadly to a
variety of situations
Usually, some financial institutions or assets suddenly
lose a large part of their value
– Banking Panics (and recessions)
– Stock market crashes
– Bursting of financial bubbles
And biggest organizations
4
5. Underline Factors
Combination of complex factors
Easy credit conditions during the 02–08 . encouraged
high-risk lending and borrowing practices without
assessing default risk
International trade imbalances
Real-estate bubbles that have since burst
Fiscal policy choices related to government revenues and
expenses
Approaches used by nations to bail out troubled banking
industries and private bondholders
5
6. U.S. Financial Crisis Inquiry
Commission Report
The findings in January 2011.
It concluded that "the crisis was avoidable and was caused by:
Widespread failures in financial regulation, including the
Federal Reserve’s failure to stem the tide of toxic mortgages
Dramatic breakdowns in corporate governance including too
many financial firms acting recklessly and taking on too much
risk
An explosive mix of excessive borrowing and risk by
households and Wall Street that put the financial system on a
collision course with crisis
Key policy makers ill prepared for the crisis, lacking a full
understanding of the financial system they oversaw
Systemic breaches in accountability and ethics at all levels
6
7. GLOBAL FINANCE CRISIS- "Red September"
September 14, 2008:
Merrill Lynch sold to Bank
of America amidst fears of
a liquidity crisis and
Lehman Brothers collapse
September 15, 2008:
Lehman Brothers files for
bankruptcy protection
September 19, 2008:
Paulson financial rescue
plan unveiled after a
volatile week in stock and
debt markets.
Sep-08
Sep-08
September 7, 2008:
Federal takeover of Fannie
Mae and Freddie Mac
September 16, 2008:
Moody's and Standard and
Poor's downgrade ratings
on AIG's credit on
concerns over continuing
losses to mortgage-backed
securities, sending the
company into fears of
insolvency.
Sep-08
Sep-08
September 17, 2008:
The US Federal Reserve
loans $85 billion to
American International
Group (AIG) to avoid
bankruptcy.
Created by Robin Thieu, 2008 Fall
September 25, 2008:
Washington Mutual was
seized by the Federal
Deposit Insurance
Corporation, and its
banking assets were sold
to JP Morgan Chase for
$1.9bn.
Sep-08
September 29, 2008:
The House rejected bailout bill, DJIA down 7%
Oct-08
October 3,2008: The
House pass the bail out
bill
7
8. Banking Panics (and recessions)
Commercial banks suffer a sudden rush of with drywalls by
depositors, this is called a bank run
September 7, 2008:
Two United States Government sponsored enterprises
(GSEs), Fannie Mae (Federal National Mortgage
Association) and Freddie Mac (Federal Home Loan
Mortgage Corporation), into conservator ship run by FHFA
September 14, 2008
Lehman Brothers files for bankruptcy.
Sale of Merrill Lynch to Bank of America
September 16, 2008
AIG faces severe liquidity crunch
Financial institutions lost a large part of their value
incoming days and weeks
8
9. IMMEDIATE EFFECTS OF CURRENT CRISIS
IN THE “UK’’
Unemployment increased by 164,000 between May
and August 2008; almost a 10 % rise from 1.63
million
Most hard hit is London where number of jobless
looking for jobs increased by 42 % in September
2008
Some estimates put 1.5 million additional
unemployment generated by end-2010 leading to
an unemployment rate of 10% from current 5.7 %.
9
10. IMMEDİATE EFFECTS OF CURRENT
CRİSIS
IN THE “USA’’
Slowdown in GDP
Current 2008 projection 1.6 % (down from 2.8 %
projection in April 2007)
2009 projection: 0.06 %
Consumer confidence lowest since 1978
October 2008 consumer sentiment index: 57.5 from
70.3 in September
Construction activity much worse: Q208 new
constructions starts are 40 % less than post 9/11
(Q401)
10
11. Indian Perspective
The Indian banking system had had no direct exposure to
the sub-prime mortgage assets or to the failed institutions.
It has very limited off-balance sheet activities or
securitized assets.
India's recent growth has been driven predominantly by
domestic consumption and domestic investment. External
demand, as measured by merchandize exports, accounts
for less than 15 per cent of our GDP.
11
12. India: Vibrant Capital Market
Sensex – The Bombay Stock Exchange index rise 20 times from 1990s to
reach 20,000 mark in November 2007.
India is among the
major destinations
across the globe for
inflow of US Dollar
25000
11 December
2007 Crossed
20,000 mark
20000
Sensex has risen
20 times in the
period 1990-2007
1
5000
30 December 1999
Crossed 5,000 mark
07 February 2006
Crossed 10,000 mark
1
0000
5000
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Emergence of
industry and
confidence of
local investors
along with the
FIIs has led to
upsurge of the
Sensex
FIIs have infused
large investments
into the Indian
stock market
Encouraging
industry
performance
Increased local
investors’
confidence
12
12
13. India: Fastest Growing Free Market Democracy
GDP Growth
Forex
FII Flow
FDI
Per Capita
Inflation
1990
4.9 %
< USD 1 billion
USD 1 million
(1993)
USD 97 million
USD 390
9%
2008*
8.7 %
USD 309 billion as
on Mar 28, 2008
USD 16.1 billion
in 2007-08
USD 12.7 billion in
2007-08 till
December (USD 16
billion in 2006-07)
USD 740
6.4 %as on
JAN 15, 2009
* Annualized data used to show comparison with 1990
13
Source: Times of India, RBI, DIPP, Indian Budget, Rediff
13
14. So the question is, why were we effected?
Increased globalization.
India's two-way trade (merchandize exports plus imports), as a
proportion of GDP, grew from 21.2 per cent in 1997-98, the year of
the Asian crisis, to 34.7 per cent in 2007-08.
Increased financial integration.
Ratio of total external transactions (gross current account flows plus
gross capital flows) to GDP, this ratio has more than doubled from
46.8 per cent in 1997-98 to 117.4 per cent in 2007-08.
Increased reliance of corporate sector on external financing
In 2007-08, India received capital inflows amounting to over 9 per
cent of GDP as against a current account deficit in the balance of
payments of just 1.5 per cent of GDP, which shows the importance of
external financing.
14
15. How India Was Hit.
Overseas financing dried up.
Corporate demand shifted to domestic banking sector.
Corporates withdrew investment from NBFCs and
MFs, putting redemption pressure
Capital flows reversed, corporates converted domestically
raised money to foreign currency to meet foreign
obligations
Rupee depreciated
15
16. Slump in demand for exports (US, ME, EU in
downturn)
Fall in outsourced services demand as overseas firms
face restructuring and downsizing
16
17. Response to the Crisis
Crisis Management:
Monetary measures
Lower interest rates, CRR, SLR, repo and reverse repo
rates
Expansion of refinance facilities for export credit
Relaxation of ECB rules for corporates, NBFCs and HFCs
17
18. Crisis Management
Fiscal Stimulus packages of Dec ‘08 and Jan ‘09
Additional public capital expenditure
Government guaranteed funds for infrastructure spending
Cuts in indirect taxes
Expanded guarantee cover for credit to MSEs
Additional support to exporters
18
19. Recovery Management
Strong rebound in investment demand
Domestic private demand remained dampened
Inflation started increasing due to high liquidity and
money supply
Monetary measures withdrawn; SLR, export credit
refinance limit, etc., restored to pre-crisis levels.
19
20. Inflation Management
Sustained increase in food prices and manufactured goods
CRR raised to contain excess liquidity
Repo and reverse repo rates were increased
Risks from sluggish global economy, rebound in global
commodity prices, volatile capital flows and high
domestic food prices remaing significant.
20
21. IN INDIAN……………………………………………..??
STOCK MARKET DOWN
INDIAN CURRENCY VALUE 1$=49.89
IT PROJECTS
INFLATION RATE [HIGHEST IS 12.6%]
GDP TOWARDS DOWN
INCREASING FUEL, METAL AND FMCG GOODS
21
22. INDIAN ECONOMY INDICATORS
BANK RATE 6.0%
REPO RATE 6.5%
REVERSE REPO RATE 5.0%
CASH RESERVE RATIO 5.5%
STATUTORY LIQUIDITY RATIO[SLR] 24%
PRIME LENDING RATE 12.5%
SAVINGS BANK RATE 3.5%
AND GDP 7.5%
INFLATION 6.4%
22
23. Fall in Share Prices
After gradual fall in the previous weeks, the
sensex fell to 8510, on 27.10.08, the lowest
in 5 years
Fall in Rupee
On 21.11.08, Rupee hits record low of
50.20, against the greenback.
23
24. Impact on Exports
Exports slided by 20 per cent of its target of $200
billion in 2008-09
Fall in Forex Reserves
Forex reserves dropped by nearly $8 billion in
early October, to $284 billion
24
25. FDI Inflow
Global meltdown - Slow down FDI
inflows.
Job Loss
Across
all
sectors
—
manufacturing, retail, realty, IT and
BPO, banking and financial services
Economic Growth
Slow down has begun and growth will
drop to about 7 percent, for the first time
in 3 years
25
26. Impact on various industries
Steel manufacturers,
Textile Sector, Hosiery,
Sports Goods,
IT, ITeS, BPO, KPO,
Diamond Exports,
Real Estate, and many others
have started feeling the heat
26
27. SEBI eases Participatory-Note norms,
Lifts 40 percent cap on overseas
derivative instruments
RBI injects 20,000 crore for Mutual
Funds
The CRR, the amount banks are
required to keep with the apex bank,
has been cut from 9 per cent earlier to
5.5 per cent in three tranches.
Short-term lending (repo) rate also
reduced
27
28. Rs 25,000 crore against farm debt
waiver
A temporary 1 per cent reduction in
SLR announced last month would be
made permanent.
High-level panel to address industry’s
woes
Market regulator SEBI is keeping
vigilant eye on short-selling and on
the settlement mechanism.
28
29. Prime Minister
Growth Rate 7.5 to 8 percent
Country not immune to what happens in the world
Finance Minister – P. Chidambaram
Adequate liquidity in the banking system
Advised banks to lend aggressively
Asked investors not to sell stocks in panic
Commerce and Industry Minister - Kamal Nath
Financial crisis may slow down FDI inflows.
Planning Commission Dy. Chairperson - Montek Singh
Ahluwalia
Global meltdown to hit growth
29
30. oWeaknesses of structured
products and derivatives
oImportance of Financial
supervision
oInter-agency coordination
required
oWe can not remain
insulated
30
Let’s begin with review what happened during the past months.We knew that:March 16, 2008: Bear Stearns gets acquired for $2 a share by JPMorgan Chase in a fire sale avoiding bankruptcy. The deal is backed by Federal Reserve providing up to $30B to cover possible Bear Stearns losses.After that event, market and investors stayed calm with believe that the crisis was in the end.But, suddenly, things got worst and turn up-side-down, and we recognized that we’re just in the end of the beginning of the more serious crisis. That was “Red September”.