Global Financial Crisis Ppt

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Pr

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Outline of the Presentation

y

y What is Recession? What is Recession? y

y What is Financial Crisis? What is Financial Crisis? y

y The Genesis of the currentThe Genesis of the current

problem problem

y

y Impact on USImpact on US y

y Causes of Sub-Prime CrisesCauses of Sub-Prime Crises y

y Economic ImbalanceEconomic Imbalance y

y Impact of thImpact of the Crisese Crises y

y What What did Govedid Govermentsrments do?do? y

y Effects on Developing CountriesEffects on Developing Countries y

y Role Role of Gof G-20 in solving financial-20 in solving financial

crises crises

y

y Effects on PakistanEffects on Pakistan y

y Current scenario across the globeCurrent scenario across the globe y

y Alternative View Alternative View y

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W

hat

is

Recession

?

A recession is defined as a period of time when the

economy contracts (negative economic growth) for 2

consecutive quarters. A recession is

consecutive quarters. A recession is characterize

characterized by

d by

y

Lower Output

y

Lower investment

y

Higher Unemployment

y

Increased PSNCR (Public Sector Net Cash

Requirements)

y

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W

hat is a Financial Crisis?

The term

fifi

_nanc

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_{al cr}

isisisis

_{is applied}

_{is applied broadly to a}

_{broadly to a variety of}

_{variety of}

situations in which

somsom

_e

fifi

_nanc

ii

_al

ii

_n

ss

_t

ii

_tut

ioio

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ss oo

_r

_a

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_et

ss

s

_{uddenly l}

osos

_{e a large part}

of of

_the

ii

_{r value}

_..

y

y 

In the past financial crises have been g

In the past financial cri

ses have been generated

enerated by

by

combination of factors such as :

y

y Overshooting of Overshooting of markmarketsets

y

y ExcExcessive levessive leveraging of eraging of debt, and debt, and credit boomscredit booms

y

y Miscalculations Miscalculations of of riskrisk

y

y Rapid outfRapid outflows lows of capital of capital from a cfrom a country ountry

y

y Unsustainable macroeconomic policiesUnsustainable macroeconomic policies

y

y InexperiencInexperience with new fe with new financial instinancial instruments, andruments, and

y

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WHAT HA

PPENED?

Low

Low interest rates, interest rates, high levhigh leverage and erage and overconfidence led overconfidence led to to thethe

creation of bubbles which then burst««.

y

y It all started a decade back with a booming It all started a decade back with a booming housing market inhousing market in

America. America.

y

y The boom was later fueled by exThe boom was later fueled by expansion of pansion of liquidity in the system inliquidity in the system in

the form of Mortgaged back

the form of Mortgaged backed ed Securities andSecurities and Collateralized DebtCollateralized Debt

Obligations (CDO) invented by Wall Street. Obligations (CDO) invented by Wall Street.

y

y In the first few years there was just too much demand for allIn the first few years there was just too much demand for all

Investment Grade

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Effective

Effective Federal FundFederal Funds Rates Rate, June , June 1954 -1954 - Jan 201Jan 20100

I

I nterest Rates have gone from 2% to 20% and then nterest Rates have gone from 2% to 20% and then down to 0.12%,down to 0.12%,

They have nowhere to go but up

They have nowhere to go but up now«..now«..

1 199555 5 1199660 0 1199665 5 1199770 0 1199775 5 1199880 0 1199885 5 1199990 0 1199995 5 2200000 0 2200005 5 2200110 0 22001155 0 0 5 5 10 10 15 15 20 20 So

So_{urce: Federal Reserve B}_{urce: Federal Reserve B}oo_ard_ardoo_{f G}_{f G}oo_vern_vernoo_rs_rs

Fed Funds Rate Fed Funds Rate

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y

y Mortgage brokers and Mortgage Lenders were more than happy toMortgage brokers and Mortgage Lenders were more than happy to

look for anybody and everybody who wanted a mortgage (Which in look for anybody and everybody who wanted a mortgage (Which in simple terms means home loan).

simple terms means home loan).

y

y In Initial few years boom was observed in American Housing MarketIn Initial few years boom was observed in American Housing Market

because

because of of Subprime Lending and Subprime Lending and CDOs.CDOs. Between year 2002 andBetween year 2002 and

2006 property price was increased by almost 40% .

y

y In case of Subprime In case of Subprime Lending Lending no one is taking enough care to see theno one is taking enough care to see the

repayment capacit

repayment capacity of by of borrowerorrower,, in some cases even margin money in some cases even margin money

was waived off.

y

y This was a perfect foundaThis was a perfect foundation fotion for disasterr disaster.. EquitEquity was scarce y was scarce andand

shor

short in suppt in supplyly..

Sub-prime Mortgage Crisis

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y

y The value of CDO sThe value of CDO started going downward. tarted going downward. It was It was unable to pay unable to pay

neither the capital nor the returns.

y

y During the year 2007, the balance sheet and profit account of During the year 2007, the balance sheet and profit account of

investment b

investment bankers, banks & ankers, banks & financial financial institutions was favorinstitutions was favorable andable and running the ride

running the ride of optimism. This helped banks infof optimism. This helped banks inf late late theirtheir earnings

earnings and profit forecasts, and profit forecasts, and in turn their and in turn their valuations.valuations.

y

y Bankers started leveraging their own banks in stock marketBankers started leveraging their own banks in stock market. A close. A close

look at the leverage ratio of top 5 banks in US tells that it was an all

time high during years 2003-2007.

y

y Higher the leverage ratio, higher is the default risk. If any bank isHigher the leverage ratio, higher is the default risk. If any bank is

levera

leveraged by 10 times, positive changged by 10 times, positive change of $1 can bring e of $1 can bring $10 profit but$10 profit but negative

negative change change of of $1 can bring $1 can bring $10 loss. With greed $10 loss. With greed increasing day by increasing day by day, people were making irrational judgments.

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y

y People were buyinPeople were buying as if g as if there was no tomorrowthere was no tomorrow. In year 2005,. In year 2005,

boom in economy

boom in economy was halted. was halted. In year 2006, there was marginalIn year 2006, there was marginal increase in property prices.

increase in property prices.

y

y In YIn Year 2006, Fed hear 2006, Fed has increaseas increased its Interest rate which in turnd its Interest rate which in turn

affected lending rate of subprime loans. affected lending rate of subprime loans.

y

y As interest rate As interest rate shooshoot t up, borrowers started defaulting, whiup, borrowers started defaulting, whichch

resulted in increased supply and reduced prices. resulted in increased supply and reduced prices.

y

y Contraction of liquidity means no aggressive lending, which inContraction of liquidity means no aggressive lending, which in

turn affected rollover

turn affected rollover of exiof existing leverage .sting leverage .

y

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y

y The immediate cause or trigger of the crisis was the bursting of The immediate cause or trigger of the crisis was the bursting of

the

the UniUnited States Hted States Housing Bubousing Bubbleble whicwhich peakeh peaked in approd in approximatximately ely 20052006.

20052006.

y

y Already Already-rising default r-rising default rates ates on subprime andon subprime and Adjustable rAdjustable rateate

mortgages

mortgages (ARM) began to increase (ARM) began to increase quickly thereafterquickly thereafter..

y

y However, once interest rates began to rise and housing prices startedHowever, once interest rates began to rise and housing prices started

to drop moderately in 20062007 in many parts of the U.S., to drop moderately in 20062007 in many parts of the U.S., refinancing became more difficult.

refinancing became more difficult.

y

y As housing prices declined, major global financial institut As housing prices declined, major global financial institutions thations that

had borrowed and invested heavily in subprime MBS reported

significant losses.

y

y FaFalling prices also resulted in lling prices also resulted in homes worth less than homes worth less than the mortgagethe mortgage

loan. loan.

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S

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US

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IM

P

A

C

T

ON

US

y

Housing prices dropped 20% from their 2006 peak.

y

T

Total

otal home equity in the

home equity in the United States, which was valued at

United States, which was valued at

$13 trillion at its peak in 2006, had dropped to $8.8 trillion by

mid-2008 and was still falling in late 2008.

y

The banks declared bankruptcy which led to layoffs

The banks declared b

ankruptcy which led to layoffs and thus

and thus

the unemployment level reached its peak during 2008.

y

Unemployment led to decr

Unemployment led to decrease i

ease in demand, thus suffer losses

n demand, thus suffer losses

which again c

which again compelled

ompelled fi

firms to

rms to decrease the num

decrease the number of

ber of

employees and thus U

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y

By early November 2008, the S&P

By earl

y November 2008, the S&P 500 was down 4

500 was down 45% f

5% from its

rom its

2007 high.

y

Losses in retirement assets, savings, investment assets and

pension assets suffered huge losses up to $8 trillion.

y

By the

By th

e end of August 20

end of August 2008,

08, various financial firms

various financial firms around the

around the

world have

world have written down their holdings of

written down their holdings of subpr

subprime related

ime related

securities by US$501 billion.

y

By 2008 more and more financial firms either merged, or

announced that they w

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Ch

_{ange in U}

SS

_{Real GDP, 1948-2009}

This has been the worst downturn since end of

This has been the worst downturn since end of World War II World War II

S

Soo_{urce: Bl}_{urce: Bl}oomoom_berg_berg

1 1994499 11995544 11995599 11996644 11996699 11997744 11997799 11998844 11998899 11999944 11999999 22000044 22000099 22001144 0 0 5 5 10 10 15 15 -5 -5 Percent (%)

Percent (%) ChCh_ange_ange

Gr

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C

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ub

-P

ri

me

C

ri

si

s

y

y BBoom Andoom And BBust In The Housing Market:ust In The Housing Market:

y

y The housing bubble that burst caused a negative wealth The housing bubble that burst caused a negative wealth affect onaffect on

the market as people began to panic and the situation rapidly the market as people began to panic and the situation rapidly deteriorated on the face of falling market prices.

deteriorated on the face of falling market prices.

y

y High-risk Mortgage Loans And Lending/ High-risk Mortgage Loans And Lending/ BBorrowing Practices:orrowing Practices:

y

y Credit ratings were manipulated to reduce the risk levels of theCredit ratings were manipulated to reduce the risk levels of the

mortgages by combing numerous securities in one large group mortgages by combing numerous securities in one large group known as M

known as MBBSS (MortgageSS (Mortgage BBacked Securities). This had theacked Securities). This had the

affect of effectively hiding the risk factor of the loans and allowing affect of effectively hiding the risk factor of the loans and allowing banks to sell them off to

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y

y Inaccurate Credit Ratings:Inaccurate Credit Ratings:

y

y Credit ratings were being assigned by credit rating firms that wereCredit ratings were being assigned by credit rating firms that were

in private hands, these firms were being paid by banks and in order in private hands, these firms were being paid by banks and in order to continue a good relationship with their clients. Low level risk to continue a good relationship with their clients. Low level risk ratings were assigned to the special investment vehicles (SIV·s) the ratings were assigned to the special investment vehicles (SIV·s) the banks were using. At one point Moody had

banks were using. At one point Moody had 40% of its income40% of its income coming from the inflow of

coming from the inflow of such credit rating activities.such credit rating activities.

y

y Government Policies:Government Policies:

y

y Extremely low interest rates, de-regulation and giving credit rating Extremely low interest rates, de-regulation and giving credit rating

authority to the private sector. authority to the private sector.

y

y BBoom And Collapse of the Shadow oom And Collapse of the Shadow BBanking System:anking System:

y

y The shadow banking systems were the The shadow banking systems were the mutual funds and their likemutual funds and their like

that played an important role in providing funds to corporations that played an important role in providing funds to corporations and other enterprises, however, they lacked the regulation and and other enterprises, however, they lacked the regulation and oversight of the banking industry.

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E

c

o

n

omi

c

I

m

balance

y

y Commodity Commodity BBoom:oom:

y

y The decade of the 2000s saw a global explosion in prices, focusedThe decade of the 2000s saw a global explosion in prices, focused

especially in

especially in commodities commodities and housing, marking aand housing, marking an end to n end to thethe commodities r

commodities recession of ecession of 1980-2000.1980-2000.

y

y In 2008, tIn 2008, the prices of many commodities, notably he prices of many commodities, notably oil and oil and food, rose sofood, rose so

high as to cause genuine ec

high as to cause genuine economic damagonomic damage, threatening stagfe, threatening stagf lation and alation and a reversal

reversal of of globalization.globalization.

y

y In January 2008, oil prices surpassed $100 a barrel for the first time, In January 2008, oil prices surpassed $100 a barrel for the first time, thethe

fir

first of many prist of many price milestones to be passed ce milestones to be passed in the course of the yearin the course of the year..

y

y In July 2008, oil In July 2008, oil peaked at $147.30 a barrel.peaked at $147.30 a barrel.

y

y An inc An increase in oil prirease in oil prices tends to divert ces tends to divert a larger share a larger share of consof consumerumer

spendi

spending into gasoling into gasoline, which creates downne, which creates downward pressure on ward pressure on economiceconomic growth in oil importing countries, as wealth f

growth in oil importing countries, as wealth flows to oil-producinglows to oil-producing states.

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S

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Source: New York Times Source: New York Times

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y

Trade

:



In mid-October 2008, the Baltic Dry Index, a measure of

shippi

shipping v

ng volume,

olume, fell

fell by 50 per cent in

by 50 per cent in one week, as the

one week, as the

credit crunch made it diff

credit crunch made it difficult for

icult for exporters to obtain letters

exporters to obtain letters

of

of credit

credit..

y

Unemployment:

y

The Int

The International Labour

ernational Labour Organ

Organization pr

ization predicts that

edicts that at least

at least

20 million jobs are lik

20 million jobs are likey

ey to be lost by the

to be lost by the end of

end of 2009 due

2009 due to

to

the crisis mostly in "construction, real estate, financial

services,

services, and the

and the auto

auto sector" 

sector"  bringing w

bringing world

orld

unemployment above

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y

Inflation:

y

y In FebruarIn February 2008, y 2008, Reuters reported that global inflation was at historicReuters reported that global inflation was at historic

levels, and that domestic inflation was at 10-20 year highs for many levels, and that domestic inflation was at 10-20 year highs for many nations.

nations.

y

y Excess money supply around the globe, monetary easing by the Fed toExcess money supply around the globe, monetary easing by the Fed to

cultivated financial crisis, growth surge supported by easy monetary cultivated financial crisis, growth surge supported by easy monetary policy in Asia, speculation in commodities,

policy in Asia, speculation in commodities, agricultural failure, rising agricultural failure, rising cost of imports from China and rising demand of food and

cost of imports from China and rising demand of food and commodities in the fast growing

commodities in the fast growing emerging markets.emerging markets.

y

y Inflation was also growing in Inflation was also growing in countries classified by the IMF as "non-oil-countries classified by the IMF as

"non-oil-exporting LDCs" (Least developed countries) and "Developing Asia", exporting LDCs" (Least developed countries) and "Developing Asia", on account of the rise in oil and food prices.

on account of the rise in oil and food prices.

y

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y

y W W

ar:

y

y The The recent wars in recent wars in Afghanistan and Iraq Afghanistan and Iraq have had a have had a significant significant

role to play in the

role to play in the causes of the current economic recession.causes of the current economic recession.

y

y A current estimate of the total cost of the war is $1.6 trillion by A current estimate of the total cost of the war is $1.6 trillion by

the end of 2009 the end of 2009

y

y Massive U.S government borrowing that contributed heavily toMassive U.S government borrowing that contributed heavily to

the debt burden of the government a

the debt burden of the government and reduced money supply nd reduced money supply

y

y At the same time it also added an atmosphere of uncertainty to At the same time it also added an atmosphere of uncertainty to

the Middle East causing fears of disruption to the oil supply and the Middle East causing fears of disruption to the oil supply and increasing price levels.

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I

mpact of the Crisis

y

Collapse

of

Financial Institutions

in several parts of the

world

y

Lehman Brothers; AIG, F

Lehman Brothers; AIG, Freddie Mac

reddie Mac and Fa

and Fannie Mae

nnie Mae etc.

etc.

y

Central Banks in vulnerable countries such as

Central Banks in vulnerable countries such as Iceland

Iceland

become Bankrupt

y

Investors across the globe lost huge amount of their

investments

y

Severe Credit squeeze

and Liquidity crunch for the industry

y

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Scale of the potential bailout Scale of the potential bailout

(already up to $850bn) (already up to $850bn)

Net foreign investment in the Net foreign investment in the

Uni

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Financial Crisis On 

S

_tock

M

arket

S

_t

oo

_ck

ss

_l

ow ow

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ss

_t

sisi

_{nce 9/11}

y

The Dow industrials

dr

oo

pped 504.48 p

oioi

nt

ss

to close at

10,917.51, the first time since July its finished under 11,000.

y

It was the sixth-largest point drop ever and the worst since Sept.

17, 2001, when

the average

f f

_{ell 684.81 p}

oioi

_nt

ss

_{on the f}

_{on the first day}

_{irst day of}

_of

trading after the terror attacks.

y

Broader stock indicators also fell.

y

The Standard & Poors 500 index lost

momo

re than 4 1/2 percent

,,

and th

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The End Of The

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S

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W

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i

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D

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I ntervened in order to prevent a systemic collapse and anntervened in order to prevent a systemic collapse and an

economic depression«««.



 Governments responded swiftly and decisively to save the systemGovernments responded swiftly and decisively to save the system



 Central banks stepped in and provided liquidity to the bankingCentral banks stepped in and provided liquidity to the banking system allowing it to keep functioning

system allowing it to keep functioning



 Expanded the money supplyExpanded the money supply



 Governments provided bailouts for major financial institutions toGovernments provided bailouts for major financial institutions to avert their collapse or took them over outright

avert their collapse or took them over outright



 Governments also cut taxes and raised spending to prevent theGovernments also cut taxes and raised spending to prevent the economy from

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Effects on Developing Countries

y

y Trade And Trade Prices:Trade And Trade Prices:

y

y Growth in China and India has increased imports and pushed upGrowth in China and India has increased imports and pushed up

the demand for copper, oil and other natural resources, which the demand for copper, oil and other natural resources, which has led to greater exports and higher prices, including from has led to greater exports and higher prices, including from African countries. Eventually, growth in China a

African countries. Eventually, growth in China and India is likely nd India is likely to slow down, which will have knock on effects on other poorer to slow down, which will have knock on effects on other poorer countries.

countries.

y

y Remittances:Remittances:

y

y Remittances to developing countries will decline. There will beRemittances to developing countries will decline. There will be

fewer economic migrants coming to developed

fewer economic migrants coming to developed countries whencountries when they are in a recession, so fewer remittances and also probably they are in a recession, so fewer remittances and also probably lower volumes of remittances per migrant.

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y

y Foreign Direct Investment (FDI) Foreign Direct Investment (FDI) And Equity Investment:And Equity Investment:

y

y These will come under pressure.These will come under pressure. W W hile 2007 was a record yearhile 2007 was a record year

for FDI to developing countries, equity finance

for FDI to developing countries, equity finance is under pressureis under pressure and corporate and project finance is already weakening. The

and corporate and project finance is already weakening. The proposed Xstrata takeover of a South African mining

proposed Xstrata takeover of a South African mining

conglomerate was put on hold as the financing was harder due to conglomerate was put on hold as the financing was harder due to the credit crunch.

the credit crunch.

y

y Commercial Lending:Commercial Lending:

y

y BBanks under pressure in developed countries may nanks under pressure in developed countries may not be able toot be able to

lend as much as they have done in the past. Investors are lend as much as they have done in the past. Investors are increasingly, factoring in the risk of some emerging market increasingly, factoring in the risk of some emerging market

countries defaulting on their debt, following the financial collapse countries defaulting on their debt, following the financial collapse of Iceland. This would limit investment

of Iceland. This would limit investment in such countries asin such countries as Argentina, Iceland, Pakistan and Ukraine.

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y

Aid:

y

y Aid budgets are under pressure because of debt problems and weak Aid budgets are under pressure because of debt problems and weak

fiscal positions, e.g. in the UK and other European countries and in the fiscal positions, e.g. in the UK and other European countries and in the USA.

USA. W W hile the promises of increased aid at the Gleneagles summit inhile the promises of increased aid at the Gleneagles summit in 2005 were already off track just three years later, aid budgets are now 2005 were already off track just three years later, aid budgets are now likely to be under increased pressure.

likely to be under increased pressure. Whil

While the e the effects wileffects will vary from country to countryl vary from country to country, the economic impacts, the economic impacts

could include:

Weaker export revenues

Further pressures on current acc

Further pressures on current accounts and

ounts and balance of payment

balance of payment

Lower investment and growth rates

Lost employment

There c

There could als

ould also be social effects

o be social effects

Lower growth translating into higher poverty

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Wo

Worlrl onomonomi i r r owowth, th, -- ndnd r r ojecojectitionsons f f oor r &&

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S_o_our_ur ce_{ce: IMF}_{: IMF WEO}_{WEO Up}_Upda_datte_{e, J}_{, Jan}_anu_ua_{ary 6,}_{ry 6,}

3 4 5 6 7 8 3 4 5 6 7 8 3 3 4 4 5 5 6 6 7 7 8 8 ---3 -3 -4 -4 e

er r cencent t (%) (%) r r owowthth

A

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Declaration of

Declaration of the Summit taken place in Nov

the Summit taken place in November 2008:

ember 2008:

1)

To enhance cooperation among the nations and work together

to r

to restore global growth and achieve needed

estore global growth and achieve needed reforms in the

reforms in the

world's financial systems.

2)

Lay the foundation for reform to help to ensure that a global

crisis, such as this one, does not happen again.

3)

T

To

o ensure that

ensure that market

market principles, open trade and in

principles, open trade and investment

vestment

regimes, and effectively regulated financial markets foster the

dynamism, innovation, and entrepreneurship that are

essenti

essential for economic gr

al for economic growth, employment, and

owth, employment, and poverty

poverty

reduction.

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I

mpact on Pakistan

y

y CCapapiital Fltal Flowsowsand W and W oorkerrkerss ReRemimittancettancess::

y

y A stressed international economic environment has held back A stressed international economic environment has held back

Foreign Investment as it posted a decline of 47.5 per cent during Foreign Investment as it posted a decline of 47.5 per cent during the first ten months of 2008-09

the first ten months of 2008-09

y

y Workers remittances to Pakistan remained vigorous and Workers remittances to Pakistan remained vigorous and

unaffected by the c

unaffected by the crisis, totaling US$ risis, totaling US$ 6.36 billion in 6.36 billion in JulyJuly-April-April

y

y CCommoommoddiity Prty Priicecess and Trade:and Trade:

y

y An unprecedented hike in An unprecedented hike in international commodity prices wreakinternational commodity prices wreakeded

chaos on Pakistan

chaos on Pakistans external sector during 2007-08, with s external sector during 2007-08, with thethe current account widening significantly.

current account widening significantly.

y

y However, in the wake of a reduction in global demand and theHowever, in the wake of a reduction in global demand and the

resultant dec

resultant decrease in commodity pricesrease in commodity prices, the , the import bill import bill hashas reduced significantly, decreasing the current account deficit reduced significantly, decreasing the current account deficit

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y

y ExExternal Fternal Fiinancnanciing:ng:

y

y The The global crisis has global crisis has restrirestricted Pakistans cted Pakistans ability to ability to tap tap thethe

international debt capital

international debt capital markets to raise funds.markets to raise funds.

y

y Pakistans presence in the international capital markets inPakistans presence in the international capital markets in

2008-09 was limited. 2008-09 was limited.

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Fis

_{cal Year 2008-09}

y

y Economic activity significantly slowed down in 2008-09.Economic activity significantly slowed down in 2008-09. y

y The current account defThe current account deficit nicit narrowed to 5.1 arrowed to 5.1 per cent of GDPper cent of GDP.. y

y Overseas remittances haOverseas remittances have increased but financial ve increased but financial infinflows (such aslows (such as

FDI and

FDI and portfolio investment) dropped portfolio investment) dropped sharplyby ovsharplyby overer

37 per centdue to macroeconomic instability and global recession. 37 per centdue to macroeconomic instability and global recession.

y

y SBP foreign SBP foreign exchange exchange reserves reserves rebounded to rebounded to about $9.1 billion (2.9about $9.1 billion (2.9

months

months of imports) by of imports) by end-juend-junene 20092009

y

y Fiscal problems continued during Fiscal problems continued during 2008-09 and the f2008-09 and the fiscal deficitiscal deficit

target was 5.2

target was 5.2 per cent of per cent of GDPGDP..

y

y Overall revenues fell substantially shorOverall revenues fell substantially short of t of the target primarily due tothe target primarily due to

a

a drop in tadrop in tax revenues as the ecx revenues as the economic slowdown reduced Ponomic slowdown reduced Pakistaakistan'sn's two main tax bases-manufacturing and imports

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Current

S

cenario

A

cross the Globe:

y

y The world is trying to recover from the aftermaths of one of theThe world is trying to recover from the aftermaths of one of the

Greatest Recessions so far with the developing countries like India Greatest Recessions so far with the developing countries like India and China leading the way.

and China leading the way.

y

y The World Bank projects The World Bank projects global GDP to global GDP to expand betweenexpand between 2.9 and 3.32.9 and 3.3

percent

percent in 2010 and in 2010 and 2011, strengthening to between 3.2 and 3.52011, strengthening to between 3.2 and 3.5 percent in 2012, reversing the 2.1 percent decline in 2009.

percent in 2012, reversing the 2.1 percent decline in 2009.

y

y Developing economies are expected to grow between 5.7 and 6.2Developing economies are expected to grow between 5.7 and 6.2

percent each year from 2010-2012. percent each year from 2010-2012.

y

y High-income cHigh-income countrountries, howeveries, however, are projected to grow by bet, are projected to grow by betweenween

2.1 and 2.3

2.1 and 2.3 percent in 2010not enough to undo the 3.3 percentpercent in 2010not enough to undo the 3.3 percent

contraction in 2009followed by between 1.9 and 2.4 percent growth contraction in 2009followed by between 1.9 and 2.4 percent growth in 2011.

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A

lternative View

y

y TTaken strong aken strong actions to stimulate the economies, provide liquidityactions to stimulate the economies, provide liquidity,,

strengthen the

strengthen the capital of capital of financial institutions, protect safinancial institutions, protect savings vings andand deposits, unfreeze credit markets, and to ensure that International deposits, unfreeze credit markets, and to ensure that International Financial Institutions (IFIs) can provide critical support for the global Financial Institutions (IFIs) can provide critical support for the global economy.

economy.

y

y Recognize the importance of monetary policy support, as deemedRecognize the importance of monetary policy support, as deemed

appropriate to domestic conditions. appropriate to domestic conditions.

y

y Ensure that the IMFEnsure that the IMF, W, World Banorld Bank have sufficient resok have sufficient resources to continurces to continueue

playing their role in overcoming the crisis. playing their role in overcoming the crisis.

y

y Reviewing and aligning global accounting standards, particularly forReviewing and aligning global accounting standards, particularly for

complex securities in times of stress. complex securities in times of stress.

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y

y GGovernments and Central Banks around the world must be active inovernments and Central Banks around the world must be active in

supervising and monitoring the activities of financial firms locally supervising and monitoring the activities of financial firms locally and

and internationallyinternationally..

y

y International Monetary Fund (IMF) should play a major role inInternational Monetary Fund (IMF) should play a major role in

regulating and auditing the global financial system. regulating and auditing the global financial system.

y

y Investment companies should be punished for conducting unfairInvestment companies should be punished for conducting unfair

practices in some countries (Tax Evasion) and financial practices practices in some countries (Tax Evasion) and financial practices must be

must be consistent consistent globallyglobally..

y

y Restrict Restrict the levthe leverageerage that financial ithat financial institutions can nstitutions can assume.assume.

y

y Establish an early-waEstablish an early-warning rning system to help system to help detect systemic risk.detect systemic risk.

y

y RequirRequire stronger capital e stronger capital and liquidity positions for and liquidity positions for financialfinancial

firms and related regulatory authority. firms and related regulatory authority.

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Conclusion

y

y The recession of 2007-09 was considered to be severe, all this showedThe recession of 2007-09 was considered to be severe, all this showed

us was the need for strong government regulation and oversight of us was the need for strong government regulation and oversight of the market in compar

the market in comparison to a completely free market scenario.ison to a completely free market scenario.

y

y Bailout packages will benefit the fBailout packages will benefit the firms only in the short run. A firmirms only in the short run. A firm

will need

will need to assess its financial position and to assess its financial position and need to take cneed to take correctiveorrective action to prevent such circumstances in the future.

action to prevent such circumstances in the future.

y

y The question of Global Economic Recovery taking place is highly The question of Global Economic Recovery taking place is highly

debatab

debatable howeverle however, we can c, we can concludonclude that the recovery is e that the recovery is indeedindeed taking place.

taking place.

y

y The road to recovery is not smooth and will take a long time beforeThe road to recovery is not smooth and will take a long time before

things ge

(47)