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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



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



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



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)



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.



SUBPRIME



SECURITIZATION

The process of turning assets into securities,

which are then assigned a value and traded.

SECURITIZATION of subprime mortgagesinitiate the credit crunch.



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.



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%



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



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)



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)



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



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



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



Interest Rate Spreads in Dollars and Euros



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.



Quarterly Real GDP Growth Rates



Interest Rates in the Eurozone and the

US (interbank rates)



EY TERMS FOR CRISIS

BAD DEBT

BOND MARKET

CORPORATION TAX

CREDIT DEFAULT SWAPS

DEFLATION

NATIONAL INCOME

SOVEREIGN DEBT



THE IRESH CRISIS AND CONSEQUENCES

FOR THE UK

TRADE UK BANK AND UK SAVERS

LABOUR MIGRATION

THE POUND



THREE MAIN BANKS IN IRELAND

1. BANK OF IRELAND

2. ALLIED IRISH BANKS 3. ISRAEL DISCOUNT BANK



BANKS AFFECTED BY IRELAND CRISIS

� Royal Bank of Scotland £4.2bn � LLYODS BANK £ 18.3bn



Major countries affected by

subprime mortgage

The United State of America

The United Kingdom

Ireland

Portugal

GreeceSpain



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



AFFECTED USA FIRMS



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



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



Impact of Financial Crisis on USA



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)



IMPACT ON UK STOCK MARKET



Sterling down sharply against the dollar



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.



Questions from A udience

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