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8/12/2019 Global Financial Crisis-Impact & Lessons
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Introduction
Story behind the Global Financial Crisis
Began in July, 2007
By 2008, crisis got worsened.
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It started in one relatively small segment of the USreal estate and mortgage market.
It ended up as a world financial crisis affecting
all international financial markets and allcapitalist countries in the world
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Meaning of 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
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Causes
Mortgage derivative products
Widespread selling of Mortgages across the
world.
Blame game on Government
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Lehman Brothers Collapse
September, 2008.
Heavy Mortgages
Its Impact:
Recognition of Financial Crisis
Banks stopped lending each other
Corporate Sector stopped borrowing..
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Sub Prime Crisis
Sub prime mortgages
Sales pressure on lenders
High ratings
Lack of regulations in financial system
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The housing bubble
Bubble driven by rising house prices.
House prices driven by increasing demand
Increasing demand driven by the permanentexpansion of mortgage finance
Stagnant labour incomes explosive growth ofprivate debt, but also growth of pirvate wealth
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The bubble bursts
Credit defaults happen
Rising interest rates
More and more subprime mortgage loans get foul
Declining house prices make refinance ever more
difficult
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The first banks fall the case
of Northern Rock The fifth largest mortgage financier in the UK
One of the major actors in the British housing
bubble
Credit defaults falling price of NR shares
The reaction: A classical run on the bank in
october 2007
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The big credit crunch a crisis of themoney market
Interbank lending the central part of the money
market
From september 2007 onwards: banks restrict or refuse
interbank lending (sharp rise of interbank interest rates
like the LIBOR and/or credit rationing)
There is no liquidity crisis - banks are not lacking
liquidity but hoarding it because they dont trust each
otherssolvency in the longer run
There is an insolvency crisis hidden bankruptcies
because of the losses still undisclosed
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DEVELOPING COUNTRIES HIT BYCRISES
Crises led to job losses and fall in consumers spending
The two main ways in which the developing countries
were affected were through the routes of finance and
trade.
There has been a big drop in funds flowing to developing
countries
Their exports to the US and Europe have dropped
sharply, as consumers cut their spending.
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Global Financial Crisis (2)
Current Account Balance (per cent to GDP)
Country 1990-94 1995-99 2000-04 2005 2006 2007 2008China 1.4 1.9 2.4 7.2 9.5 11.0 10.0
India -1.3 -1.3 0.5 -1.3 -1.1 -1.0 -2.8
Russia 0.9 3.5 11.2 11.0 9.5 5.9 6.1
Saudi Arabia -11.7 -2.4 10.6 28.7 27.9 25.1 28.9United Arab
Emirates 8.3 4.6 9.9 18.0 22.6 16.1 15.8
United States -1.0 -2.1 -4.5 -5.9 -6.0 -5.3 -4.7
Memo:Euro area n.a. 0.9 0.4 0.4 0.3 0.2 -0.7
Middle East -5.1 1.0 8.4 19.7 21.0 18.2 18.8
Source: World Economic Outlook Database, April 2009, International Monetary Fund.
Note: (-) indicates deficit.
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Impact on India (1)Trends in Capital Flows
Component Period 2007-08 2008-09
Foreign Direct Investment to India April-February 27.6 31.7
FIIs (net) April-March 20.3 -15.0
External Commercial Borrowings (net)April- December 17.5 6.0
Short-term Trade Credits (net) April- December 10.7 0.5
Total capital flows (net) April- December 82.0 15.3
Memo:
Current Account Balance April- December -15.5 -36.5
Valuation Gains (+)/Losses (-) on
Foreign Exchange Reserves April- December 9.0 -33.4
Foreign Exchange Reserves
(variation)April-December 76.1 -53.8
April-March 110.5 -57.7
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AustraliasResponse
Stimulus Strategy
Inflation in the local economy
Government Deposits
The automotive industry given a helping hand
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Impact on India
Information Technology
Exchange Rate
Foreign Exchange Outflow
Investment
Real Estate
Stock Market
Exports
Increase in Unemployment
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Emerging and developing
economies drive globaleconomic growth
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Lessons
Financial markets have a tendency to go completely
away.
The drive to become more competitive regardless of the
cost will only aggravate the crisis.
We need to break the vicious circle in which rising
inequality means that demand has to be propped up to
deal with it, with both inequality and demand fuellingspeculative bubbles
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