07-global economy1.ppt

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BY

HAMIMAH HASSAN



INTRODUCTION PURPOSE:

1. TO PROVIDE BACKGROUND OF GLOBAL

ECONOMIC CRISIS

2.TO EXPLAIN INDICATORS OF ECONOMICRECOVERY



The backgroud The financial crisis of 2007–2009 has been called the

most serious financial crisis since the GreatDepression by leading economists

The crisis began in the United States and spread toother parts of the world ( given the fact that US has thelargest economy globally)

http://en.wikipedia.org/wiki/Great_Depression






Contributors to failure in the US economy HOUSING BUBBLES

CREDIT BUBBLES

COMMODITY BUBBLES



1. HOUSING BUBBLESbursting of the United States housing bubble peakedin approximately 2005–2006 causing by high defaultrates on "subprime" and adjustable rate mortgages

(ARM)

(subprime refers to the credit quality of particularborrowers, who have weakened credit histories and a

greater risk of loan default than prime borrowers)

http://en.wikipedia.org/wiki/United_States_housing_bubble

http://en.wikipedia.org/wiki/Subprime_lending

http://en.wikipedia.org/wiki/Adjustable_rate_mortgage

http://en.wikipedia.org/wiki/Adjustable_rate_mortgage

http://en.wikipedia.org/wiki/Subprime_lending

http://en.wikipedia.org/wiki/United_States_housing_bubble



Whose out? COUNTRYWIDE was sued for "Unfair Business

Practices" and "False Advertising"



2. CREDIT BUBBLES From housing, the situation led to credit bubbles

Investment banks, hedge funds and certainregulated banks had assumed significant debtburdens and did not have a financial cushionsufficient to absorb large loan defaults or MBS

(morgate back securities) losses.

These losses impacted the ability of financialinstitutions to lend, slowing economic activity.



Cont’ AIG, an insurance company insured obligations of

various financial institutions through the usage ofcredit default swaps

However, AIG was lacked of financial strenght whenmany financial instutions faced loan defaults



Innovative financial products turned

‘disaster’ Banks offers products (e.g the adjustable-rate

mortgage; the bundling of subprime mortgagesinto mortgage-backed securities (MBS) or

collateralized debt obligations (CDO)) for sale toinvestors, and also a type of securitization; and aform of credit insurance called credit defaultswaps(CDS).

Its financial risks were difficult to be assessedresulting to consumers to rely on the banks’definition of risk management

http://en.wikipedia.org/wiki/Adjustable-rate_mortgage


http://en.wikipedia.org/wiki/Mortgage-backed_securities

http://en.wikipedia.org/wiki/Collateralized_debt_obligations

http://en.wikipedia.org/wiki/Securitization

http://en.wikipedia.org/wiki/Credit_default_swaps




http://en.wikipedia.org/wiki/Securitization

http://en.wikipedia.org/wiki/Collateralized_debt_obligations










Whose out/down? Lehman Brothers was liquidated

Bear Stearns and Merrill Lynch were sold at fire-sale

prices Goldman Sachs and Morgan Stanley (formerly an

investment banks) became commercial banks,subjecting themselves to more stringent regulation

AIG was taken over by US govt

http://en.wikipedia.org/wiki/Lehman_Brothers

http://en.wikipedia.org/wiki/Bear_Stearns

http://en.wikipedia.org/wiki/Merrill_Lynch

http://en.wikipedia.org/wiki/Goldman_Sachs

http://en.wikipedia.org/wiki/Morgan_Stanley

http://en.wikipedia.org/wiki/Morgan_Stanley

http://en.wikipedia.org/wiki/Goldman_Sachs

http://en.wikipedia.org/wiki/Merrill_Lynch

http://en.wikipedia.org/wiki/Bear_Stearns

http://en.wikipedia.org/wiki/Lehman_Brothers



3. Commodity bubble

A commodity price bubble was created followingthe collapse in the housing bubble.

The price of oil nearly tripled from $50 to $140from early 2007 to 2008, before plunging as thefinancial crisis began to take hold in late 2008.

The causes; an increase in oil prices tends to diverta larger share of consumer spending into gasoline,

which creates downward pressure on economicgrowth in oil importing countries, as wealth flowsto oil-producing states



THE BAIL OUT The Emergency Economic Stabilization Act of

2008, commonly referred to as a bailout of the U.S.financial system, is a law enacted in response to the

subprime mortgage crisis authorizing the US StatesSecretary of Treasure to spend up to US$700 billion topurchase distressed assets, especially mortgage-backed securities, and make capital injections intobanks. Both foreign and domestic banks are includedin the bailout. The Federal Reserve also extended helpto American Express, whose bank-holding applicationit recently approved

http://en.wikipedia.org/wiki/Bailout

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

http://en.wikipedia.org/wiki/United_States_dollar

http://en.wikipedia.org/wiki/Mortgage-backed_security


http://en.wikipedia.org/wiki/Federal_Reserve

http://en.wikipedia.org/wiki/American_Express

http://en.wikipedia.org/wiki/American_Express

http://en.wikipedia.org/wiki/Federal_Reserve




http://en.wikipedia.org/wiki/United_States_dollar

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

http://en.wikipedia.org/wiki/Bailout



ECONOMIC STIMULUS PACKAGE- $152

billion for 2008

The law provides for tax rebates to low- and middle-income U.S. taxpayers

tax incentives to stimulate business investment

an increase in the limits imposed on mortgages

eligible for purchase by government-sponsoredenterprises

http://en.wikipedia.org/wiki/Tax_rebate

http://en.wikipedia.org/wiki/Taxation_in_the_United_States

http://en.wikipedia.org/wiki/Tax_incentive

http://en.wikipedia.org/wiki/Economic_stimulus

http://en.wikipedia.org/wiki/Mortgage

http://en.wikipedia.org/wiki/Government_sponsored_enterprises






http://en.wikipedia.org/wiki/Mortgage

http://en.wikipedia.org/wiki/Economic_stimulus

http://en.wikipedia.org/wiki/Tax_incentive

http://en.wikipedia.org/wiki/Taxation_in_the_United_States

http://en.wikipedia.org/wiki/Tax_rebate



THE GLOBAL SPREAD a number of European bank failures, declines in various

stock indexes, and large reductions in the market value ofequitiesand commodities

the de-leveraging of financial institutions, as assets weresold to pay back obligations that could not be refinanced infrozen credit markets, further accelerated the liquiditycrisis and caused a decrease in international trade.

At the end of October 2008 a currency crisis developed, withinvestors transferring vast capital resources into strongercurrencies such as the yen, the dollar and the Swiss franc,leading many emergent economies to seek aid from theInternational Monetary Fund (IMF)

http://en.wikipedia.org/wiki/Commodity


http://en.wikipedia.org/wiki/Leverage_%28finance%29

http://en.wikipedia.org/wiki/International_Monetary_Fund









In Japan, UK….. In Japan, banks and insurers announced a combined

249 billion yen ($2.4 billion) in potential losses tied tothe collapse of Lehman

In UK, a lawyer from The Royal Bank of ScotlandGroup said the company is facing between $1.5 billionand $1.8 billion in claims against Lehman partiallybased on an unsecured guarantee from Lehman andconnected to trading losses with Lehman subsidiaries

http://en.wikipedia.org/wiki/Japan

http://en.wikipedia.org/wiki/Royal_Bank_of_Scotland_Group




http://en.wikipedia.org/wiki/Japan



In Hong Kong… In Hong Kong more than 43,700 individuals in the city

have invested in HK$15.7 billion of "guaranteed mini-bonds" from Lehman, in which many claim that banksand brokers mis-sold them as low-risk.

In October 2008, the Hong Kong Association of Banks,

agreed to buy back the bonds, which will be pricedusing an agreed upon methodology based on itsestimated current value

http://en.wikipedia.org/wiki/HK$

http://en.wikipedia.org/wiki/Hong_Kong_Association_of_Banks

http://en.wikipedia.org/wiki/Hong_Kong_Association_of_Banks

http://en.wikipedia.org/wiki/HK$



EMPLOYMENT In the US, by end of 2008, the unemployment rate rose

to 6.7 percent , where 533,000 people lost their jobs

In Feb. 2009: Japan's Panasonic Corp. was cutting up to15,000 jobs and closing dozens of plants worldwide asit braces to fall deep in the red due to the global

economic crisis.



In the UK, since 2006 till October 2008, Britishcompanies have confirmed the loss of 154,266 jobs.



REBOUND? Goldman Sachs, the iconic investment bank, turned itself

into a commercial bank holding company in September2008 and managed to survive Wall Street's meltdown withthe help of a federal bailout. By April 2009, Goldman

announced that it was healthy enough that it would seek toraise new capital and return the money it had receivedfrom the government

On June 17 2009, Goldman Sachs repaid govt USD 10billion and became one of 10 banks to repay about $68billion in bailout funds received from the Troubled AssetRelief Program.



HAS THE GLOBAL

ECONOMY RECOVERED? Growth in developed economies, including the USA

and the eurozone, are forecast to rise substantially in2010 and 2011 as the housing and credit markets beginto improve.

In the USA, the world's largest economy, real GDP

growth is projected to be 2.0% in 2010 compared to0.1% in 2009;



IN ASIA? The major developing economies, including China and

India, are also set to experience a noteworthyslowdown in growth over 2008-2009, perhaps more

than had previously been expected.

In Developing Asia, growth is projected to rise to 8.4%

in 2010 after reaching 7.7% in 2009 and stabilise ataround 8.5% per year in 2011-2012;



HOW ASIA WAS AFFECTED? EXPORT? Over the years, Asia has become integrated into a

global supply chain. So, a large fraction of trade withinthe region reflects intra-industry processing and

assembly through vertically integrated productionchains.

the total trade exposure of Asia to the United Statesand Europe has increased over time.

And because exports are such a high share of Asia'sGDP, the region is actually more exposed to shocks inadvanced economies than other regions.



HOW ASIA WAS AFFECTED?

ASIA’S FINANCIAL INSTITUTIONS? Asian financial institutions entered the global

financial crisis with limited exposure to subprime-related instruments, and most had relatively healthy

financial positions and strong capital buffers.

Still, the dramatic increase in Asian participation in

international financial markets has led to severalchannels of transmission of the global financialturmoil to the region.



IN MIDDLE EAST? The outlook for the Middle East is the most stable of

all regions (thanks to the knock-on effects of high oilprices, which have created large amounts of liquidity)

However, growth is still set to slow from 2009 andother problems, particularly high inflation and anoverdependence on uncertain hydrocarbon revenues, will threaten prospects.

Some parts of the region, for instance the UAE, havealso been hugely reliant on foreign capital and credit,the scarcity of which is now likely to contribute to aslowdown



Inflation: A key factor in determining

the economic outlook Globally, the IMF predicts that inf lation will peak at

6.2% in 2008 before falling to 4.6% in 2009 anddipping further until 2012. Although most economies

will follow this trend, inflation will remain highest indeveloping countries. For instance by 2010, inflation will still be 11.3% in the Middle East and 10.2% in theCommonwealth of Independent States (CIS) andMongolia. This is mainly due to excess liquiditygenerated from the export of commodities, chiefly oiland minerals, which is being reinvested domesticallyand is rapidly adding to local money supply



CONCLUSION The economic downturn which began in 2007 and will

continue through 2009 is expected by many analysts to beamongst the most severe in the past 100 years.

While the scale of the downturn remains uncertain, the fullimpact on the real economy has not yet been felt

Although a global rebound is expected in 2010, evenemerging economies have proven considerably more vulnerable than previously believed, demonstrating theintegrated nature of global financial and credit markets.



CONCLUSION Real GDP growth in more advanced markets such as

the USA or UK is projected to rebound from 2009 andstabilise by 2012.

Meanwhile, the longer-term trend in key developingmarkets such as China or India will be a gradualslowdown in growth over the same period.

Inflation forecasts are clouded with uncertainty andcommodity prices – especially those of oil – will play akey role in determining the growth outlook for mostcountries.



WORLD’S GDP GROWTH NEGATIVE AND MINIMAL GROTH IN 2009

MINIMAL POSITIVE GROWTH BEGINNING 2010



THANK YOU

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