managerial economics_global financial crisis management

8/3/2019 Managerial ECONOMICS_Global Financial Crisis Management

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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




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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




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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


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




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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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