Global Financial Crisis: A Catalyst for change in Global Economic Paradigm

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Global Financial Crisis A Catalyst for change in
Global Economic Paradigm
Professor B. P. Singh Chairman Delhi School of
Professional Studies Research Formerly, Head
Dean Faculty of Commerce Business Delhi School
of Economics University of Delhi Delhi
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Agenda For Presentation

• Anatomy of the Downturn Cause and Effect
• How it has been managed?
• Factors affecting Economic Supremacy of a Country
  
• Position of USA till 2008 and current predictions
  in the wake of current meltdown
• Changing outlook for 2009 10

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Cont

• Global Financial Crisis A Catalyst for change in
  Global Economic Paradigm
• Cost of Bankruptcy
• Restructuring of the Economy A
  Remedy
• Dimensions of Restructuring
• Acquisitions and Restructuring
• Policy Goals What States Want From Restructuring

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Anatomy of the downturn A closer look at the
global credit crunch
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Governments in Great Britain, Belgium, the
Netherlands even Iceland have been forced to
bail out some of their biggest banks
The credit crunch may have its roots in the US,
but its now a global problem
The Rudd Government has moved to protect bank
deposits for the next 3 years
Importantly, the Australian banking system, which
is more regulated than that in the US, has held
up very well
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Anatomy of a downturna closer look at the global
credit crunch
January 2008
March 2007
US Federal Reserve cuts interest rates to 0.75
amid fears the US economy could fall into
recession
JP Morgan buys US investment bank Bear Stearns in
an emergency rescue deal US Federal Reserve
provides US200 billion to commercial banks in
another bid to free up market liquidity in
addition to 700 billion announced by US Govt. to
rescue wall street.
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Cont...
April 2008
International Monetary Fund warns losses related
to the credit crunch could top US1 trillion
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Cont...
September 2008
7 September 2008 US government seizes control of
mortgage lenders Fannie Mae and Freddie Mac 15
September 2008 Lehman Brothers files for
bankruptcy. Merrill Lynch is bought by Bank of
America for US50 billion 16 September 2008
American International Group (AIG), the USs
biggest insurer, receives an US85 billion loan
from the US Federal Reserve to stave off
bankruptcy 28 September 2008 US bank, Washington
Mutual, is seized by US regulators in the biggest
US bank failure in history
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Cont...
September 2008
28 September 2008 Britain, Belgium the
Netherlands are forced to bail out several
major banks. US govt Announces US700 billion
plan to rescue Wall Street US House of
Representatives narrowly rejects the US700
billion bailout plan by a vote of 228-205,
sending global share markets tumbling 29
September 2008 Citigroup bids for US bank
Wachovia in a deal backed by US authorities
30 September 2008 55 billion dollars is wiped
off the Australian share market in a single
day One day later, the market recovers by more
than 4
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Cont...
October 2008
3 October 2008 After a second vote, the US House
of Representatives passes the US700 billion
bailout plan 6 - 10 October 2008 Concerns that
bailout plan wont prevent a global recession
sends global shares sliding Japan
-24.3 Europe -22.2 UK - 21.0 US -18.2
Australia -15.6
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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 depends upon its
state in terms of Hard and Soft Power
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In 2007
2020, 2030
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Weight of US Economy on the Skids Since 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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Position of USA till 2008
Predictions in the wake of Current Meltdown

• Since the early 20th century, the US has been
  the top economic power in the world.
• - Worlds largest consumer market
• The USs economic weight has fallen steadily
  since 2000.
• 2000 32 2007 around 25

• Global Economy is expected to slow down.
• Despite a rise in productivity driven by
  technical innovation, global economic growth will
  slow overall due to aging population and
  shrinkage in economically active population

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Position of USA till 2008 (Cont)
Predictions in the wake of Current Meltdown
(Cont)

• Emerging economies, including BRICs, are growing
  rapidly.
• - Average growth of 6.9 during 2002-2007 (Global
  economy 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 of immigrants and
  productivity improvement)
• Euro 2-3 1-2 growth (shrinking labor
  population)
• Japan 1-2 growth (rapidly aging population)
• China 6-7 growth 4-5 growth from 2020
  (declining economically active population
  slowing productivity growth)

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Position of USA till 2008 (Cont)
Predictions in the wake of Current Meltdown
(Cont)

• China showed especially fast growth.
• - Annual average growth of 10 since entering WTO
  in 2001
• - IMF predicts China will overtake Japan in 2010
  to become the No. 2 economy

• - India 6-7 growth (growing population and
  productivity improvement)
• As early as 2026, China may replace the US as
  the worlds largest economy.
• India is expected to overtake Japan in 2023.
• Economic weight of BRICs will continue to rise.
• 16.1 in 2010 25.1 in 2020 31.7 in 2030
  

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Position of USA till 2008 (Cont)
Predictions in the wake of Current Meltdown
(Cont)

• US holds dominant position in all areas that
  create financial power financial hub, center of
  financial assets institutions.
• US holds 56.1 of the worlds financial assets
• 34 of bonds (as of 2006)
• Stock market capitalization 4.5 times that of
  Japan, the worlds second-largest market

• Financial power of Europe and emerging countries
  will strengthen.
• - Significant advancement expected in sovereign
  wealth funds and emerging countries

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Position of USA till 2008 (Cont)
Predictions in the wake of Current Meltdown
(Cont)

• Among the worlds ten major banks, three are US
  banks
• New York is the global financial hub
• Except for London, most other financial hubs
  specialize in narrow financial services

• Absolute financial power of the US will weaken
  but its superior status will continue.
• - In the wake of the financial crisis, the US
  financial industry will undergo a temporary
  contraction

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Position of USA till 2008 (Cont)
Predictions in the wake of Current Meltdown
(Cont)

• US maintains financial power based on its key
  currency status and advanced financial acumen.
• US Dollar Recycling Mechanism
• USs current account deficit Increasing
  liquidity in countries with current account
  surplus Swelling foreign currency reserves of
  these countries Investment in the US

• US will continue to hold competitiveness thanks
  to large comprehensive financial groups
• Commercial banks investment banks combined

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Position of USA till 2008 (Cont)
Predictions in the wake of Current Meltdown
(Cont)

• US has quality workforce, core factor of
  financial industry
• Financial crisis caused contraction in US
  investment banks.

• Financial power will be divided between the US
  and Europe.
• Impact of Chinas rapidly growing financial
  power will be limited to Asia

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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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Cont.
Source The Implications of the Global
Financial Crisis for Low-Income Countries,
International Monetary Fund, March 2009. LICs
Low Income Countries
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(No Transcript)
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An Emerging Polarity in Global Structure by 2030
Economic Power Index
Note The Economic Power Index (EPI) represents
scores based on the sum of comparative outlook in
seven areas (US100) economic scale, key
currency, financial power, resource-securing
capability, science technology, regional
leadership, and global governance.
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Global Financial Crisis A Catalyst for Change in
Global Economic Paradigm

• The global financial crisis paved the way for
  China 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 international
  monetary system

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Cont.

• Emerging Polarity
• The US maintains the largest clout in the world
  thanks to its defence and technological
  superiority.
• Once becomes politically integrated, Europe
  will emerge as a key force in international peace
  and mediation work on the back of its soft power
  and new values.
• Backed by its huge economic scale, China will
  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 a period 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 how China
  and India will evolve in terms of their
  diplomatic relations in the future
• The most important variable in this
  relationship would depend upon how Chinas
  political and economic systems will grow and take
  shape.

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Cost of Bankruptcy..

• Bankruptcy Historical Vignettes 
• The penalty for declaring bankruptcy in Ancient
  Rome was slavery or being cut to pieces. The
  choice was left to the creditor. By the Middle
  Ages, the treatment of insolvent debtors had
  softened considerably.
• In Northern Italy, bankrupt debtors hit their
  naked backsides against a rock three times before
  a jeering crowd and cried out, I declare
  bankruptcy.
• In French medieval cities, bankrupts were
  required to wear a green cap at all times, and
  anyone could throw 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-affected economy,
  it is essential to link together a restructuring
  of the financial and the corporate sectors, a
  so-called rapid sequencing 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 set
  internally
• Parent 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 governs the sold-off
  assets as part of its hierarchy.

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Which way is the best to Restructure

• is always based on the objectives of
  Restructuring..

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Policy Goals What States Want From Restructuring 

• ENSURE OPPORTUNITY FOR RESIDENTIAL AND SMALL
  BUSINESS PARTICIPATION
• ENCOURAGE GROWTH OF EFFICIENT, COMPETITIVE
  GENERATION OF MARKET
• ACHIEVE BROAD CUSTOMER NEW ALTERNATIVE SUPPLIER
  PARTICIPATION

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Cont.

• ADDRESS TRANSITIONAL UNECONOMIC STRANDED COSTS
• RETAIN SYSTEM BENEFITS (RELIABILITY, LOW-INCOME
  ASSISTANCE, CONSERVATION RENEWABLES)

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