Introduction

Story behind the Global Financial Crisis

Began in July, 2007

By 2008, crisis got worsened.




It started in one relatively small segment of the US
real estate and mortgage market.

It ended up as a world financial crisis affecting
all international financial markets and all
capitalist countries in the world
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

Causes

Mortgage derivative products

Widespread selling of Mortgages across the
world.

Blame game on Government




Lehman Brothers Collapse

September, 2008.

Heavy Mortgages

Its Impact:

Recognition of Financial Crisis

Banks stopped lending each other

Corporate Sector stopped borrowing..



Sub Prime Crisis

Sub prime mortgages

Sales pressure on lenders

High ratings

Lack of regulations in financial system



The housing bubble
Bubble driven by rising house prices.

House prices driven by increasing demand

Increasing demand driven by the permanent
expansion of mortgage finance

Stagnant labour incomes explosive growth of
private debt, but also growth of pirvate wealth


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
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

The big credit crunch a crisis of the
money 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
others solvency in the longer run
There is an insolvency crisis hidden bankruptcies
because of the losses still undisclosed

DEVELOPING COUNTRIES HIT BY
CRISES
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.

Global Financial Crisis (2)
Current Account Balance (per cent to GDP)
Country
1990-94 1995-99 2000-04
2005 2006 2007 2008
China 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 28.9
United 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.
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

Australias Response
Stimulus Strategy

Inflation in the local economy

Government Deposits

The automotive industry given a helping hand
Impact on India
Information Technology
Exchange Rate
Foreign Exchange Outflow
Investment
Real Estate
Stock Market
Exports
Increase in Unemployment



Emerging and developing
economies drive global
economic growth


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 fuelling
speculative bubbles