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Summary of contents
o International capital markets
Equity markets
Debt markets
Financial crisis of 2008
Regulatory issues
The international monetary system
The IMF and World Bank
Global markets for corporate control
Conclusions
THE CRISIS
THE GLOBAL BUSINESS ENVIRONMENT
Equity markets
o Shares in listed companies are traded on stock
exchanges
o Global capital flows are shifting to Bric countries; China
has overtaken New York in new listings of companies
o Global companies now often seek listings outside their
home countries In countries which are growing markets or where new
investors are emerging
In countries where costs and regulation are more
advantageous
o Institutional investors, such as pension funds and
investment funds, are major players in capital markets
THE GLOBAL BUSINESS ENVIRONMENT
Debt markets
o A bond is a loan instrument which promises to pay a fixed
sum on a fixed date, and to pay interest to the lender
o Many organizations issue bonds, from companies to
governments
Sovereign debt, or government debt, has grown to huge
proportions
Regulatory issues
o It had been widely assumed that financial markets
would be self-regulating
o The near-collapse of banks and other companies,
which had to be bailed out by governments, led to a
rethinking of stricter regulation
o How can future crises be prevented?
Compel banks to become more conservative in strategy and
national in focus
Raise capital adequacy requirements for banks
Bring derivatives trading within regulatory framework
Conclusions
o Financial markets have become globalized, offering
opportunities for companies and governments to access
capital, but also posing risks.
o Equity markets, once concentrated in the western
developed economies, are now rapidly growing in
emerging markets.
o New technology and innovative financial instruments
facilitated rapid growth in global finance, but also carried
risks, culminating in the financial crisis of 2008.
o The IMF and World Bank oversee both development
issues and financial stability in member countries.
o MNEs have benefited from financial globalization,
pursuing acquisition strategies.
THE GLOBAL BUSINESS ENVIRONMENT
Introduction
The credit crunch had its origins in 2007 when warnings
started coming out of America regarding the sub-prime
market for mortgages.
This led to a number of credit defaults and therefore losses
by banks and other financial institutions.
The global nature of banking meant the problem was spread
around the world.
As a result banks have been robbed of resources and find it
difficult to lend money.
This has caused a recession as businesses and households
find it hard to borrow money.
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Origins
Sub-prime mortgage lending
Selling house loans to risky individuals such as
NINJAS no income, job or assets.
Started in the USA but also done in the UK by
companies such as Northern Rock.
Inevitably these individuals defaulted causing
losses and write downs in bank assets.
When a bank is owned money e.g. from a loan it
counts as an asset; if this loan defaults then it
becomes toxic and leads to a write down in
asset values.
THE GLOBAL BUSINESS ENVIRONMENT
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Origins
Securitisation of these mortgage debts
Example:
Mortgagee 1
owes $100k
+
Mortgagee 2
owes $250k
+ etc
TOTAL = $350
SOLD
OF SAY
SOLDININPARCELS
BLOCKS EG
$10K
$10k TO
TO OTHER
OTHER BANKS
BANKS
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Securitisation contd
As a loan can be an asset someone owes you
money it can be sold to another party
(bank).
Banks made mortgages attractive by grouping
them together in risk classes, eg, high, low
and medium risk (of default).
In some instances mixed risk securities
(called: slicing and dicing) were sold; when
the sub prime loans (high risk) defaulted, the
entire security dropped in value and became
worthless.
THE GLOBAL BUSINESS ENVIRONMENT
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Origins
Sometimes these securitised loans were sold on with
insurance known as Credit Default Swaps, to make
them more attractive to buyers.
In addition, other credit derivative products
essentially bets placed on the performance of the
securitised products were created by banks and sold on to
other institutions. These too dropped in value or became
worthless when the original or underlying loan defaulted.
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SUMMARY
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Time lines
July 2007,Federal Reserve Chairman Ben
Bernanke says sub prime may cost US
$100bn.
Sept 2007
Banks wary of each other as the bank lending
rate (Libor) reaches a then record of 6.7%
Run on Northern Rock in UK as depositors
withdraw about 1b.
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Time lines
Jan 2008, World Bank warns of worldwide recession;
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Time lines
Sept 2008: The Storm------ Lloyds Bank takes over HBOS in biggest banking
takeover
Bradford and Bingley nationalised
Lehman Brothers (US) collapse
Losses and bank collapses reported all over
Europe
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Time lines
Nov/Dec 2008, UK interest rates cut to 3%;
Eurozone recession declared; FTSE falls a
record 32% in one year.
Jan/Feb 2009, Chinese exports fall for first
time in 20 years; several UK retailers announce
bankrupcy, eg, Woolworths; UK interest rates
cut to 1.5%; US gov. pump a further $800bn
into economy; total of 140b spent on bailing
out UK banks.
THE GLOBAL BUSINESS ENVIRONMENT
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Latest situation
http://www.bbc.co.uk/news/special_reports/
global_economy/
http://www.ukpublicspending.co.uk/uk_natio
nal_debt_chart.html
http://www.telegraph.co.uk/finance/budget/
9932748/Budget-2013-Britains-debt-anddeficit.html
THE GLOBAL BUSINESS ENVIRONMENT
Unemployment
now 2.49m in UK
(7.7%)
Shortage of
credit
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Effects on Economy
(Short Term)
Unemployment/wage reductions +
Economic growth eg new business start
ups
Stock market falls/value of businesses Trust of the banking sector Corporate failures inluxury goods areas
e.g. Cars +
Prospects for credit dependent business,
e.g,. houses, cars, yachts etc THE GLOBAL BUSINESS ENVIRONMENT
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Effects on Economy
(Long Term)
Anyone's guess but.... recessions often usher in
growth in new business areas in their wake.
Recession
WW2
1970/80s
1992/93
Internet
2008/09
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Reasons to be cheerful?
Economists are looking for signs of
recovery
in the UK:
http://news.bbc.co.uk/1/hi/education/8244285.stm
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The future
Continuing austerity till 2018-2020?
Find out medium to long term forecasts from
Bank of England
BBC
FT
The Economist
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Further reading
Kay, J. (2004) The Truth About Markets,
Penguin
http://www.policynetwork.net/uploadedFiles/Publications/Publication
s/pp2.2%2044-48_KAY.pdf
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