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Global Financial Crisis: ACatalyst for change in Global
Economic Paradigm
Professor B. P. SinghChairman
Delhi School of Professional Studies & Research
Formerly, Head & DeanFaculty of Commerce & BusinessDelhi School of Economics
University of DelhiDelhi
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Agenda For Presentation
Anatomy of the Downturn : Cause andEffect How it has been managed? Factors affecting Economic Supremacy
of a Country
Position of USA till 2008 and currentpredictions in the wake of currentmeltdown
Changing outlook for 2009 10
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Anatomy of the downturnA closer look at the global credit crunch
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The creditcrunch may haveits roots in theUS, but its now aglobal problem
The Rudd Government hasmoved to protect bankdeposits for the next 3 years
Governments in GreatBritain, Belgium, theNetherlands & even Icelandhave been forced to bail outsome of their biggest banks
Importantly, the Australianbanking system, which ismore regulated than that in
the US, has held up very well
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January2008
March2007
Anatomy of a downturna closer look at the global credit crunch
US FederalReserve cutsinterest rates to0.75% amidfears the USeconomy couldfall into
recession
JP Morgan buys US
investment bank Bear Stearnsin an emergency rescue deal
US Federal Reserve provides
US$200 billion to commercialbanks in another bid to free upmarket liquidity in addition to$700 billion announced by USGovt. to rescue wall street.
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Cont...
April2008
International Monetary Fund warns
losses related to the credit crunchcould top US$1 trillion
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Cont...September2008
7 September 2008: US government seizes control ofmortgage lenders Fannie Mae and Freddie Mac15 September 2008: Lehman Brothers files forbankruptcy. Merrill Lynch is bought by Bank of Americafor US$50 billion16 September 2008: American International Group(AIG), the USs biggest insurer, receives an US$85billion loan from the US Federal Reserve to stave offbankruptcy28 September 2008: US bank, Washington Mutual, is
seized by US regulators in the biggest US bank failure inhistor
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Cont...September
200828 September 2008Britain, Belgium & the Netherlandsare forced to bail out several major
banks. US govt Announces US$700billion plan to rescue Wall Street
US House of Representativesnarrowly rejects the US$700 billion
bailout plan by a vote of 228-205,sending global share marketstumbling29 September 2008
Citigroup bids for US bank Wachoviain a deal backed by US authorities
30 September2008$55 billion dollarsis wiped off theAustralian sharemarket in a single
day
One day later, themarket recovers
by more than 4%
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Cont...
3 October 2008: After a second vote,the US House of Representativespasses the US$700 billion bailout plan6 - 10 October 2008: Concerns thatbailout plan wont prevent a globalrecession sends global shares sliding:
Japan -24.3%Europe -22.2%UK - 21.0%US -18.2%Australia -15.6%
October
2008
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The list of casualties kept growing.
In this way it has been managed
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Economic Supremacy of a Country dependsupon its state in terms of Hard and Soft Power
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Weight of US Economy on the SkidsSince 2000
Source: IMF, World Economic Outlook DB, Oct, 2008
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Growth Rate Predictions.
Source: IMF, World Economic Outlook, 2008
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Since the early 20 th century, the US hasbeen the topeconomic power in
the world.- Worlds largestconsumer market The USs economic
weight has fallensteadily since 2000.- 2000: 32% 2007:around 25%
Global Economy is expectedto slow down.- Despite a rise in productivitydriven by technical innovation,
global economic growth willslow overall due to agingpopulation and shrinkage ineconomically active population
Position of USAtill 2008
Predictions in the wake ofCurrent Meltdown
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Emergingeconomies, includingBRICs, are growingrapidly.- Average growth of6.9% during 2002-2007 (Globaleconomy grew 3.3%)
- Weight of BRICs:5.3% in 1992 12.8%in 2007
Emerging countries will lead
the global economic growth.- US: 2-3% growth (inflow ofimmigrants and productivityimprovement)- Euro: 2-3% 1-2% growth(shrinking labor population)- Japan: 1-2% growth (rapidlyaging population)- China: 6-7% growth 4-5%growth from 2020 (decliningeconomically active population
& slowing productivity growth)
Position of USAtill 2008 (Cont)
Predictions in the wake ofCurrent Meltdown (Cont)
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China showedespecially fastgrowth.- Annual averagegrowth of 10% sinceentering WTO in2001- IMF predicts China
will overtake Japanin 2010 to becomethe No. 2 economy
- India: 6-7% growth (growingpopulation and productivityimprovement) As early as 2026, China mayreplace the US as the worlds largest economy. India is expected to overtakeJapan in 2023.
Economic weight of BRICswill continue to rise.- 16.1% in 2010 25.1% in2020 31.7% in 2030
Position of USAtill 2008 (Cont)
Predictions in the wake ofCurrent Meltdown (Cont)
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- Among the worlds ten major banks,three are US banks- New York is theglobal financial hub
Except forLondon, mostother financialhubs specialize innarrow financialservices
Absolute financial power ofthe US will weaken but itssuperior status will continue.- In the wake of the financialcrisis, the US financial industrywill undergo a temporarycontraction
Position of USAtill 2008 (Cont)
Predictions in the wake ofCurrent Meltdown (Cont)
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US maintains financialpower based on its keycurrency status andadvanced financial acumen.
- US Dollar RecyclingMechanism USs current accountdeficit Increasing liquidityin countries with currentaccount surplus Swellingforeign currency reserves ofthese countriesInvestment in the US
- US will continue tohold competitivenessthanks to largecomprehensivefinancial groups
Commercialbanks & investmentbanks combined
Position of USAtill 2008 (Cont)
Predictions in thewake of Current
Meltdown (Cont)
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- US has qualityworkforce, corefactor of financial
industry Financial crisiscaused contraction inUS investment
banks.
Financial power will bedivided between the US andEurope.
Impact of Chinas rapidlygrowing financial power will belimited to Asia
Position of USAtill 2008 (Cont)
Predictions in the wake ofCurrent Meltdown (Cont)
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Changing outlook for 2009
Source : The Implications of the Global Financial Crisis for Low-
Income Countries, International Monetary Fund, March 2009. LICs = Low Income Countries (WEO: World Economic Outlook)
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A E i P l i i Gl b l S b 2030
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Note : The Economic Power Index (EPI) represents scores based on thesum of comparative outlook in seven areas (US=100) economic scale,
key currency, financial power, resource-securing capability, science &technology, regional leadership, and global governance.
An Emerging Polarity in Global Structure by 2030Economic Power Index
Gl b l Fi i l C i i A C l f
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Global Financial Crisis: A Catalyst forChange in Global Economic Paradigm
The global financial crisis paved the way forChina to shorten by more than two years,from the time necessary to catch up with
industrialized countries, including the US. The US and Europe underwent two lost
years due to the financial crisis and Japan
for 4-5 years.( IMF,2008) Change in key currency and internationalmonetary system
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Cont. Emerging Polarity The US maintains the largest clout in the
world : thanks to its defence andtechnological superiority.
Once becomes politically integrated, Europewill emerge as a key force in internationalpeace and mediation work on the back of itssoft power and new values.
Backed by its huge economic scale, Chinawill likely play the role of the epicentre of
Asia and emerging markets.
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Cont..
The next 20 years (2010-2030) will be aperiod of transition in global economic order
The US hegemony will gradually weaken Key variable in the shift of global economic
order will be the emergence of BRIC
countries, especially China.
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Cont.
The biggest uncertainty shall lay on howChina and India will evolve in terms of theirdiplomatic relations in the future
The most important variable in thisrelationship would depend upon how Chinaspolitical and economic systems will grow andtake shape.
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Cost of Bankruptcy.. Bankruptcy Historical Vignettes
The penalty for declaring bankruptcy in AncientRome was slavery or being cut to pieces. The choicewas left to the creditor. By the Middle Ages, thetreatment of insolvent debtors had softenedconsiderably.
In Northern Italy, bankrupt debtors hit their nakedbacksides against a rock three times before a jeering
crowd and cried out, I declare bankruptcy. In French medieval cities, bankrupts were requiredto wear a green cap at all times, and anyone couldthrow stones at them.
- Source: World Bank, Doing Business in 2004
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Restructuring of the Economy :A Remedy
To promote recovery in a crisis -affectedeconomy, it is essential to link together a
restructuring of the financial and thecorporate sectors, a so-called rapidsequencing restructuring of the
economy.
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Dimensions of restructurings
Asset restructuring Acquisitions
Divestitures Spin offs Corporate downsizing Outsourcing
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Cont.
Restructuring ownership structure,leverage
Exchange offers Share repurchases LBO (Leveraged buyouts) LCOs (Leveraged cashouts)
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Acquisitions and Restructuring
Corporate Restructuring Divestitures (sell-offs versus spin-offs)
Spin-off
Spin-off represents a pro-rata distribution of shares of a subsidiary to shareholders.Occurs within the hierarchy.
Terms and valuation of the assets are setinternallyParent stockholders create new board & TMT.
Parent can maintain ties with spun-off unit.
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Cont
Sell-off Sell-offs: Assets are sold to another
firm for cash and/or securities.Occurs outside the hierarchy.
Value determined by market forces. Acquiring firm absorbs and governsthe sold-off assets as part of itshierarchy.
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Which way is the best toRestructure
is always based on theobjectives of Restructuring..
Polic Goals: What States
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Policy Goals: What StatesWant From Restructuring
ENSURE OPPORTUNITY FORRESIDENTIAL AND SMALL BUSINESSPARTICIPATION
ENCOURAGE GROWTH OF EFFICIENT,COMPETITIVE GENERATION OF
MARKET ACHIEVE BROAD CUSTOMER & NEW
ALTERNATIVE SUPPLIERPARTICIPATION
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Cont.
ADDRESS TRANSITIONALUNECONOMIC STRANDED COSTS
RETAIN SYSTEM BENEFITS(RELIABILITY, LOW-INCOME
ASSISTANCE, CONSERVATION &RENEWABLES)
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