global recession and recovery

8/14/2019 global recession and recovery

1/54

GLOBAL FINANCIAL CRISIS

SEEMS TO HAVE COME TO AN

ENDRECOVERY IS UNDERWAY


2/54

WE DISCUSS:

ORIGIN OF CRISIS

EFFECTS OF CRISIS

CURRENT SCENARIO

THE ROAD AHEAD


3/54

ORIGIN OF CRISIS

JO H N PA U L B E S T


4/54

ORIGIN OF CRISIS

Real estate boom

Bursting of housing bubble in America

ARM ( adjustable rate mortgages ) Increase in loan incentives

Investment made by financialinstitutions

Downfall of shadow banking


5/54

CASE OF HOUSING BUBBLE

During 1997 2006 prices of a typicalUS home went up to 124 % of itsvalue

People started investing in realestate taking huge amounts asloans

By 2008 the prices started decliningsharply

People who were in heavy debts sold

off their property for cheap pricesand the rest be an to default


6/54

EASY CREDIT CONDITIONS

Federal reserves lowering of interestrates from 6.5% to 1 % during theyear 2002

Then increased the federal fundssignificantly between the period of2004 july and 2006 july

This led to an increase in 1 year and5 year ARM rates

Deficit finance


7/54

SUBPRIME LENDING

Subprime refers to credit quality ofparticular borrowers who happenedto have weakened credit histories

and a greater risk of loan defaultthan prime borrowers

Proximate event to increase subprimemortgages was the April 2004

decision by the US securities andexchange commission(SEC) to relaxthe net capital rule

This encouraged many investmentbanks to dramatically increase their


8/54


9/54

CREDIT DEFAULT SWAPS (CDS)

A type of insurance contract (afinancial derivative) that lenderspurchase against the possibility of

credit event associated with debt, aborrowing institution, or otherreferenced entity.

As long as the credit events (defaults)never occurred, issuers of CDSscould earn huge amounts in feesrelative to their capital base.

Since CDSs were technically not


10/54

COLLAPSE OF SHADOW

BANKING Paul Krugman described shadow

banking as the core of what

happened to cause the crisis It is also known as parallel banking

Borrow short term in liquid markets to

purchase long term illiquid and riskyassets

Directly effected by any change incredit markets


11/54

EFFECTSO

FGLO

BAL

ECONO

MIC

.CR

ISIS

.P R IYA N K A R P


12/54

EFFECTS OF FINANCIAL CRISISGLOBALLY

Entire world is reeling under afinancial crisis.

Mainly due to, subprime lending

falling prices of the houses

crisis of confidence and consequent

flight of creditors thereby leading tocollapse of mortgage finance.


13/54


14/54

Crisis of confidence leads consumer

aversion to spending Fall in housing and real estate prices Fall in demand for goods and

services Resorting toTrade Distorting

Protectionism Leads to drop in international trade

in commodities and services Gets into a Vicious Cycle

Job cuts and serious unemploymentproblem followed


15/54

EFFECTS ON USA

Financial system in US has crumbled.

Markets failed.

Unemployment rate reported to be9.7%.

Over 34 million people use of Food

Stamps.

US bound transactions has decreased.


16/54


17/54

EFFECTS ON UK

2.4 million workless households in UKduring April-June according togovernment reports.

At least one in six homes in the UK havenot got one person employed.

Six million people are out of work in UK,and claiming benefits according to

research made public this week. Thesix million figure is nearly triple theofficial 2.4 million rate ofunemployment.


18/54

EFFECTS ON RUSSIA

Russian economys GDP have fallento 23.2% which is falling 9.5% onyear on year basis.

Downturn has heavy attribution tothe falling oil prices.

Almost two million Russians lost their

jobs. Falling living standards and financial

problems.


19/54

EFFECTS ON AFRICA

Many infrastructure projects weredelayed and even cancelled whichwas very important for their

economic development. Average growth rate fell to 3%

comparing to average growth rate

of 6% during 2004-2008.


20/54

EFFECTS ON UAE

In UAE, $582 billion worth projects in

construction field is now on hold while a

further $698 billion remains in operation.

In real estate sector also projects are

deferred.

Real estate projects continue to account fo

a huge 84% of the $1.28 trillion total

budget; compared with only 8% each for

the infrastructure and leisure and

entertainment sectors.


21/54

EFFECTS ON CHINA

Less affected by the crisis due to theclosed financial system.

Chinas growth rate was 9% in2008-09 which was very lesscomparing to past five years.

There was consecutive drop in

housing prices and also it affectedmany industrial sectors like IT,electrical, textiles and non-ferrousindustries.


22/54

EFFECTS ON INDIA

Less affected by the crisis due to: Closed financial system

Domestic savings and corporate earnings

Low export dependence High employment

Large consumption base

High government expenditure

Indias growth rate decreased to 6.5%which was around 9% for past threeyears.


23/54

Due to the impact of global economic

recession, Indian stock marketcrashed from the high of 20000 to a

low of around 8000 points.

Employment was worst affected and

109,513 people lost their jobs

between August and October 2008.


24/54

CURRENT SCENARIO

M E N D A V IK A S


25/54

CURRENT SCENARIO

United Nations economists havesaid there is no signs of earlyrecovery from this crisis.

Suggestion : Create a new worldreserve system using several

currencies rather than just dollarand call for tough controls on thecross border financial flow.


26/54

CONTD

This is not recovery, it is just anattempt to recover from the currentcrisis which is on a right track, its

just a fiction not yet here.

It will be dangerous if governments

across the world think that therecovery is happening and withdrawthe stimulus packages and policies.


27/54

SITUATION IN INDIA

GDP of many countries is rapidlygoing down, while india hasdecreased considerably less.

9.5% to 6.5%

India has shown a strong degree ofresilience across all the sectorsexcept the exports.


28/54

CONTD

Revival is seen in sectors like autosales, relative high-growth ininfrastructure and easing of intrest

rates.

This all has led to induction of

consumption demand.


29/54

CONTD

Domestically by FY10 situation isexpected to improve.

While for the global economicsituation and external inflow thegovernment is still skeptic.


30/54

CONTD

The Indian IT sector is expecting torecover by the mid of 2010.

Various other sectors are optimisticabout the recovery, the mostoptimistic is education,

entertainment, aviation.


31/54

WHAT DOES THE WORLD BANK

SAY? Recovery is on the right track for

most of the developing economies.

But for the poor countries thestruggle is much more severe, as

they dont have finance to increasethe consumption.


32/54

WHAT DOES US GOVT SAY?

The recovery is underway and theyare planning to reduce the stimuluspackages they provided.

But the economist have a differentview.


33/54

CONTD

US GDP: 2009: -2.8

2010: 0.8

Unemployment Rate: 2004: 5.5%

2009:9.3%

2010:10.1%


34/54

INDIAN CONSUMER

The indian consumer has reducedthe consumption because of theeffect on their salaries.

The current situation has boosted uptheir savings nature.

The main target of the govt is to

boost up the consumerconsumption.


35/54

INDIAN INFRASTRUCTURE

INDUSTRY The infrastructure industry currently

contributes 26.7% to industrialoutput of the nation.

So it is an important tool to boost up

the Indian economy.


36/54


37/54

CONTD

The govt is planning to invite tendersfor 3 mega infrastructure roadprojects by the end of this year.

But there are problems in managingthese projects.


38/54

CONTD

Though the govt. has the money tospend on infrastructure projects butthere is lack of management and

political uncertainty.

As far as private sector in

infrastructure is concerned it isgrowing well.


39/54

NEED FOR SOLUTION TOIMPROVE.

So overall we can say that the currentsituation is still not better and theGlobal Economic structure is Underconstruction.

We need to plan for the future actionsto recover as soon as possible.


40/54

THE ROAD AHEAD

P A V E N R A J


41/54

WHAT CAN BE DONE?


42/54

FISCAL POLICIES

Government influences the economy bychanginghow it (Government) spends and collectsmoney1] Tax cuts for

businesses or

forindividuals

More moneyavailable for

spending

Demand picksup; Market

can recover;

2] MoreSpending

by Govt. to

create jobs

Individuals getsalary andspend

money3] Automatic

fiscal policy;Unemployment

Insurance

Some income tounemployedpeople to spend


43/54

MONETARY POLICIES

1] Reducereserve

ratio

More moneyavailable for

bankto give loans

Demand picksup; Market

can recover;3] Use its own

reservedmoney to buy

Govt. bonds

It becomes anincome to Govt.to inject money

into the market

Central Bank manipulates the available supplyof money in the country

2] Lower theinterest rates

Individuals takemore loan


44/54

MAJOR STEPS TAKEN

STEPS TO PREVENT COLLAPSE OFFINANCIAL SYSTEM (SPENDING ONHEALTH INSURANCE)

RESCUE OF FINANCIAL INSTITUTIONS-BAILOUT PACKAGES

GOVERNMENT TAKEOVERS


45/54

KEYNESIAN PATH TO RECOVERY

INCREASE LIQUIDITY

RESTART CREDIT FLOW

FUNDING FROM IMF AND WORLDBANK AND CAPITAL SURPLUS

COUNTRIES

STIMULATE INVESTMENT ANDDEMAND FOR GOODS AND

SERVICES


46/54

MISSION NOTACCOMPLISHED..!! Projections by congressional budget office

imply that over the period from 2010-2013-the output gap, will be more than $2 trillion.

To increase long term prospects, immediateshort term spending should be encouraged

More stimulus needed.

PAUL KRUGMAN ARTICLES, OCTOBER 1ST 2009


47/54

-G 20 SUMMIT AT PITTSBURGH

Tighter regulation over financialinstitutions, complex financialinstruments

The United States will be expected toincrease its savings rate, reduce itstrade deficit and address its huge

budget deficit. Countries like China, Japan and

Germany will be expected to reducetheir dependence on exports by

promoting more consumer spending


48/54

ROBERT ZOELLICK

COMMENTS Many emerging economies willbecome the major drivers of worldgrowth

Countries less reliant on US will growmore.

More loans are to be given to the

developing countries World bank running dry of funds

Massive spending by world

economies will come to an end by-NEW YORK TIMES 27TH SEPTEMBER 2009


49/54

JOB LOSSES

Casting a long shadow over globalrecovery

Will continue for many more months

10.1% in US by 2010 and 12% in eurozone in 2011

Early pull back in Govt. spendingcould harm the recovery

IMF- SEMI ANNUAL WORLD OUTLOOK - 1ST OCTOBER 2009


50/54

ISSUES TO PONDER

WILL EURO REPLACE DOLLAR AS THEGLOBAL CURRENCY?

BABY BOOMERS ISSUE

TRIFFIN DILEMMA AND

ESTABLISHMENTOF SDR.


51/54

EURO REPLACING DOLLAR

Not long after the introduction of theEuro as a cash currency in 2002, thedollar began to depreciate steadily invalue

An interest rate reduction by the FederalReserve on September 18, 2007,raised the Euro's value significantlyand caused the dollar to fall below0.70 one month later, to new recordlows.

China, the biggest foreign owner of U.S.Treasury securities, together with Indiaand Russia are backing away from the


52/54

BABY BOOMERS ISSUE

Social security for baby boomers

Huge working force retiring

Health concerns


53/54

TRIFFINS DILEMMA There was a solution to the Triffin dilemma for the U.S.:

reduce the number of dollars in circulation bycutting the deficit and raising interest rates toattract dollars back into the country. Both thesetactics, however, would drag the U.S. economy intorecession

On March 23, 2009, in a speech named "Reform theInternational Monetary System", Zhou Xiaochuan,explicitly named the Triffin Dilemma as the rootcause of the economic disorder, and proposedstrengthening existing global currency controls,through the IMF, as a solution. This would involve agradual move away from the US dollar as a reservecurrency, and towards the use of SDRs (IMF SpecialDrawing Rights) as a global reserve currency.


54/54

CONCLUSIONYou have to buy, I have to buy,

somebody has to sell.

Economic activity will take place in a

scale larger than ever

Increasing activity will lead to

RECOVERY

THE QUESTION IS

WHEN ??

global recession and recovery

Documents