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CAUSES OF IRISH FINANCIAL CRISIS & ITS
EFFCTS ON UK ECONOMY
PRESENTED TO:MODULE LEADER. DELE AMUSAN
PRESENTED BY:
1. WAJEEHA FAKHRI
2. TANVEER 3. ANIL
4. ABIJEET
5. GURBAG
MANAGING THE EXTERNAL ENVIORNMENT
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PRESENTATION AGENDA
Terminologies & Key points in Presentation
Credit Crunch Concept
Origination Sub Prime Mortgage & Lending
Global Effects of Sub Prime Mortgage Crisis
Impact of Global Crisis on UK Economy
How did it affect the EU zone
Financial crisis in US and How countries did affected and the
companies that fell victims
The Irish financial crisis and its affected banks
Remedies Conclusion
References
Question Answer Session
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CREDIT CRUNCH
CONCEPT
Credit Crunch also knownas Credit Squeezing. Thisis an economiccondition when there is
reduction in the generalavailability of loans.
Financial Derivatives� Financial instruments whose value
is derived from the value of something else. E.g. Shares,Bonds, Currency and speciallyused in Sub Prime Lending etc.
Financial Leveraging� The use of credit or borrowed
funds to improve one's speculativecapacity and increase the rate of return from an investment, as in buying securities on margin
Commission Based Earnings� This model of earnings too playeda big role in the creation of the biggest credit bubble in history.
CAUSES OF CREDIT
CRUNCH
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HISTORIC BUBBLES
Dutch Tulip Mania (1630s)
South Sea Bubble (1710s)
British Railway Bubble (1840s)
US Railway Bubble (1880s)
Roaring Twenties (1920s)
Multi Bubble (1960s)
Internet Bubble (1990s)
Housing Bubble (2000s)
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T.A.R.P
Troubled Asset Relief Program, initiated by
U.S government as first response toeconomic crises that aimed at helping banksto get rid of TOXIC ASSETS they are holdingat that time.
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SUBPRIME
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SECURITIZATION
The process of turning assets into securities,
which are then assigned a value and traded.
SECURITIZATION of subprime mortgagesinitiate the credit crunch.
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CREDIT CRUNCH & IRELAND
The Irish Republic was one of the biggest success stories of the boom, with its economynicknamed the "Celtic Tiger ".
But its major economic growthwas dependent on a property
bubble.
PIGS:
Troubled and heavily-indebtedcountries of Europe - Portugal,Ireland, Greece and Spain.
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Statistics of PIGS
PIGS Countries Deficit % of GDP Government Debt Debt % of GDP
Portugal 9.3% ¼127.9 bln 76.1%
Ireland 14.4% ¼104.5 bln 65.5%
Greece 15.4% ¼288 bln 126.8%
Spain 11.1% ¼560.5 bln 53.2%
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According to BloomBerg
Ireland¶s gross funding need for 2011 will be23.5 billion euros ($32 billion), falling to 18.6billion euros in 2014, the nation¶s debt
agency said.
The funding need will be 20.7 billion euros in2012 and 18.9 billion euros in 2013
Reference: Paul Dobson - Nov 12, 2010
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IRELAND FIGURES
Economy, in European Union: 13th largest
Latest GDP figure: 0.3% (Third quarter of 2009)
Gross debt in 2010 : 82.9% of GDP Gross debt in 2007: 25.4% of GDP
Jobless rate: 13.3%
Population: 4,450,014
Stocks performance 2010: -1.5% (to 11 February)
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IRELAND IMPACT ON FTSE
Eurozone crisis sends FTSE tumbling into the redas Portugal faces pressure to seek a bailout.
After the substantial bailout of Ireland, fears aregrowing that Portugal could be the next country toseek help, sparking a wider crisis throughout theeurozone.
By DAILY MAIL REPORTER (Nov,2010)
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The Ireland Financial Crisis
Transmission from the United States Housing Price Bubble and Collapse
Financial Market Freeze and Collapse Policy Response
± Support for Financial Sector ± Monetary Policy ± Fiscal Policy
� Effect of the Euro Currency Zone � Greece¶s Problems
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Transmission from United
States � US Housing Bubble created by
± Low interest rates
± Lax regulation of sub-prime mortgages with adjustable rates, two year teaser rates ± Securitization of mortgages, sold to unwary buyers as highly rated
� US Bubble popped when
± Interest rates rose in 2006, housing prices fell ± Subprime mortgages and securities defaulted
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Ireland Crisis Began Later
� US Housing Prices peaked in late 2006
� European Housing Prices peaked a year later
� Financial Crisis struck Ireland & US at same
time, August 2007, after Bear , Stearns, Fannie Mae & Freddie Mac taken over with US
Government assistance in April and July of 2007
� International credit markets froze up in August
2007 when subprime based hedge funds
collapsed in Europe and US. No longer able to
borrow short-term funds, banks faced much
higher risk premia
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Interest Rate Spreads in Dollars and Euros
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W hy did the Crisis Spread?
� Subprime Debt Obligations made in USA held around the world caused global financial shock. � Housing bubbles burst in UK , Ireland, Spain as well as US. � Failure of Lehman Bros in September 2007 caused massive panic over counterparty risk. AIG required $180 billion bailout to cover Credit Default Swaps,
insurance against bond defaults underwritten without reserves. � Stress on banks around the world led to shrinking credit availability. ³Shadow´ off-balance-sheet banking sector collapsed as short-term funding vanished. � Falling demand spread from US to all countries; as US imports dropped, other countries¶ exports fell.
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Quarterly Real GDP Growth Rates
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Interest Rates in the Eurozone and the
US (interbank rates)
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EY TERMS FOR CRISIS
BAD DEBT
BOND MARKET
CORPORATION TAX
CREDIT DEFAULT SWAPS
DEFLATION
NATIONAL INCOME
SOVEREIGN DEBT
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THE IRESH CRISIS AND CONSEQUENCES
FOR THE UK
TRADE UK BANK AND UK SAVERS
LABOUR MIGRATION
THE POUND
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THREE MAIN BANKS IN IRELAND
1. BANK OF IRELAND
2. ALLIED IRISH BANKS 3. ISRAEL DISCOUNT BANK
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BANKS AFFECTED BY IRELAND CRISIS
� Royal Bank of Scotland £4.2bn � LLYODS BANK £ 18.3bn
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Major countries affected by
subprime mortgage
The United State of America
The United Kingdom
Ireland
Portugal
GreeceSpain
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W hat companies were victims of
the subprime mortgage ?
America International Group (AIG) America Freedom Mortgage
America Home Mortgage
Lehman Brothers
Merrill Lynch
Bear Stearns Northern Rock Chrysler
General Motors
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AFFECTED USA FIRMS
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Known Losses So Far««.
Citigroup $11bn Merrill $8bn Morgan Stanley $3.7bn HSBC $3.4bn Bear Sterns $3.2bn UBS $3.4bn Deutsche Bank $3.4bn Bank of America $3bn Barclays Bank $2.6bn BNP Paribas $2.1bn Credit Suisse $1bn Wachovia $1.1bn IKB $1bn
««. And on and on and on««..
= $ 46.9 bn
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What the Press think
Two years of downturn predicted for housing¶ Times 08/11/07
µCommercial property gloom spreads¶ F inancial Times 04/11/07
µ
Property fears as bonuses squeezed¶ F
inancial Times 03/11/07
µOutlook uncertain for house prices¶ F inancial Times 31/8/07
µHouse prices drop for second month running¶ Times 08/11/07
µ Quietening down on the building sites¶ Times 08/11/07
µ Housing Boom to fizzle out¶ Daily Telegraph 08/11/07
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Impact of Financial Crisis on USA
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IRISH & GLOBAL CREDIT CRUNCH IMP AC T
ON UK ECONOMY
Economic Indicators 2007 2008 2009 2010
Gross Domestic Product 0.3% -2.00% 0.40% 0.80%
Industrial Production Index 0.9% 0.10% -9.80% 3.3%
Base Rate 5.5% 2.00% 0.5% 0.5%
Unemployment 5.2% 6.4% 7.8% 7.7%
Inflation Rate 2.1% 3.1% 2.9% 3.2%
Government Debt 44.1% 47.2% 48% 64.6%
(£952.8 b)
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IMPACT ON UK STOCK MARKET
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Sterling down sharply against the dollar
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SOURCES OF DATA
Compiled data from various sources including Bloomberg
Factiva
Risk MetricsG
roup/Securities Class Action Services Financial Times
Wall Street Journal
Web Site and articles from January 2001 to 2010.
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Questions from A udience