Transcript global financial crisis

GLOBAL FINANCE TURMOIL
Group 7:
• Verónica Vargas
• Diana Sánchez
• Ever Sáenz
• Daniel I. Ochoa
WHAT HAPPENED, WHAT IS HAPPENING IN THE
FINANCE MARKETS?
The principal world financial markets are in a crisis
where the primary ingredients are:
High volatility
• Drops in global markets indexes
• Unconfident banks, investors, and finance institutions
• Overleveraging of banks and financing companies
• Assets infected (principally mortgages in the U.S.)
• Bankruptcies of big finance firms
• U.S. and global governments rescue plans
•
WHAT HAPPENED?
Housing Market
Excess
Housing
Inventory
House
Prices
Decline
- Overbuilding
because of
speculation
Negative
effects in
the
economy
Negative
effects in
the
economy
Mortgage
cash flows
declines
Finance Market
Liquidity
crunch for
businesses
Bank failures
(Wachovia,
Lehman Bros.,
Washington
Mutual)
Government and Industries
Responses
Central
Banks
actions
Mortgage
Delinquency
and
Foreclosure
Wrong borrowing
and lending
policies
- Easy credit
policies
-Business
investment
declines
-Unemploy
ment
increases
-Stock
market
declines
Inability to
refinance
mortgage
Fiscal
stimulus
package
Home
owner
assistance
Bank
capital
levels
depleted
- Fannie &
Freddie
- AIG
- Etc…
One-off
bailouts
and
bankruptci
es
Bank
Losses
- Bailout Plan $700 billion
- Interest rate cuts
- Capitalization of Banks
- Stop short-selling
Systemic
Rescue
WHAT IS HAPPENING?
•
High Volatility in the stock markets
CBOE Volatility Index
5 year
Last week
WHAT IS HAPPENING?

Constant drops in global market indexes
DJIA 5 years
FTSE 100 5 years
DJIA last week
FTSE 100 last week
WHAT IS HAPPENING?

Constant drops in global market indexes
S&P 500-5 years
Nikkei 225-5 years
S&P 500 last week
Nikkei 225 last week
WHAT IS HAPPENING?

Unconfident financing institutions
The high volatility and low liquidity among banks and finance
companies create a feeling of distrust among the lenders

Credit is shrinking
Credit has been diminishing because of the sense of distrust among
the banks; consequently businesses will reduce their spending and
expansion, as well as domestic spending will diminish

Blue-chip stocks poor performance
The price of the so called “high performance” stocks are being
affected by market volatility and are suffering substantial drops
WHAT IS HAPPENING?
•
•
•
•
•
Illiquid assets could not be valued yet
Latest earnings reports of blue chips companies in the US are lower than
forecasted; this drives uncertainty
“There’s a continuous vortex of selling, led by levered, scared hedge fund
community stepping on each other trying to get in front of the other guy to
liquidate, based upon the real investment that they’ve experienced.”– Doug
Kass, president of Seabreeze Partners
Disappointing economic reports, a fall in retail sales of 1.2% last month
(the worst in 3 years), and wholesale prices surged suggest the stilltightening of earnings, higher expenses and declining demand in the US
Bank customers are transferring funds from troubled to healthier banks,
practically deciding which banks will become rescued by the US
government bailout plan
WHAT IS HAPPENING?
Europe


“UK’s bailout plan show some cracks” say some of the lenders in the UK.
They claim that market conditions will not let them to overcome the price
charged by the government to guarantee their debt, “the price is to high”
and “it’s going to become another hit on earnings” -Citigroup
Iceland cuts its interest rate to 12%. There are “worries on national
bankruptcy”
- Joel Sherwood (Wall Street Journal)
Asia

Nikkei falls 9.55%
WHAT IS HAPPENING?
In summary:
The finance markets are bouncing after this deterioration
of its system (subprime crisis, banks overleveraging, etc.).
Like a ball that was thrown from a higher height, the
market will bounce until it stabilizes.
Why this turmoil can be traced back
to the U.S. credit crisis?
The interdependence of the world’s
financial markets
Why this turmoil can be traced back to the U.S. credit
crisis?

Many reasons of the credit crisis.
1.
2.
3.
4.
5.
Subprime Mortgages.
Fed Failing to properly gauge and contain credit expansion .
An excessive use of credit.
Discernible lowering of credit standards.
Heavy reliance on leverage.
What is special about this crisis?





It is play out in the markets & institutions in the world’s
financial centers.
It is harder to determine the magnitude of the problem.
Directors and Seniors managers of the financial institutions that
fail to implement policies.
Private credit rating agencies.
The explosion of securitization.
How this Crisis Affect the Global Economy?







Economic slow down
Liquidity
Bad assets
Confidence
Shortage capital
Higher Inflation
Lower growth
Contd.
“We still have a very long way to go. We don't all
need to have the same policies, but we must all
talk to each other about our policies, and consider
the effects of our actions on our partners.” (StraussKahn )
The interdependence of the world’s financial markets.

How the countries are inter related:
1.
2.
3.
4.
5.
6.
Exchange rates.
Financial Institutions.
Financial Centers.
International monetary Fund.
Imports / Exports.
Interest Rates.
Central Bank’s Coordinated Effort
Governments across the world have stepped up their interventions
to stem the worst financial crisis in decades. They are taking a
variety of measures to restore liquidity, revive the ailing banking
system and rebuild investors’ confidence.
Interest Rates Reductions …






Federal Reserve
European Central Bank
Bank of England
Canada’s Central Bank
Sveriges Riskbank
Swiss National Bank
▫
▫
▫
▫
2.00%
4.25%
5.00%
3.00%
4.75%
3.00%
The People’s Bank of China:
Reserve Bank of Australia
Hong Kong Monetary Authority:
Bank of Japan (Support)
1.50%
3.75%
4.50%
2.50%
4.25%
2.50%
Liquidity and Lending Guarantees

US: Government guarantee senior debt issued by banks in 3 yrs

EU: Unlimited liquidity to be offered






Portugal, €20bn in guarantees
Spain, up to €100 bn of bank debt
France, €320bn to guarantee bank lending
Germany, €400bn
Belgium guarantee all new financing
Uk, new short and medium-term debt issues, £250bn borrowing, and
£to swap
China: reduced holding deposits,
waved 5% withholding tax levied

Japan: $20bn additional liquidity
injection

Bank deposit guarantees



US, from $100,000 to $250,000 per depositor; unlimited
guarantees on deposits in accounts.
EU: guarantee €50,000 savings for one year, some up to
€100,000
 UK, increased level to £50,000 from £35,000
Australia: from A$600bn to A$700bn guaranteed
Bank Recapitalization


US: up to $250bn to be used to buy preferred. Injected into nine big
banks.
Japan: Restrictions on companies buying back shares, and suspend
the sale of government-owned stocks.

France: Government €40bn to buy stakes in companies

Germany: Government provide €100bn in state funds

Iceland: Took 3 largest banks
Asset Purchase


US: Up to $100bn to be used to purchase bank assets
Australia: Government double to A$8bn its planned purchase
of residential mortgage backed securities
Short-Selling crackdown

US: Banned short selling in 900 companies; ban lifted on Oct 8.

Canada: Banned short selling in 13 companies; ban lifted on Oct 8.

UK: Banned short selling in 34 financial stocks till Jan 16 2009.

Iceland: Banned short selling in six financial institutions.
Will these policies work?

According to Central Banks:
“Credit markets will take some time to unfreeze; even if they stabilize...
broader economic recovery will not happen right away. However, some
easing of global monetary conditions is therefore warranted.“

Lord Norman Lamont, former UK Finance Minister:
“All of these moves I think are meant mainly just to demonstrate that
the authorities in different countries can act together. I think it was
seen as symbolic rather than anything else. We have debt deflation;
people have amassed huge debts.”
Will these policies work?

Analysts in favor:


Shows Governments proactive
Specially when confidence is not a strong:
“…these policies do will help the confidence, even if they have lost
their power to spur stock market rallies” (Wall Street Journal)
“… the move is to be applauded, the playbook to avoid
depressions says rates need to be as close to zero as possible.”
(Shepherdson, chief United States economist at High Frequency
Economics)
Time of recession
•
Probably 6 to 9 months as longer 1 year
•
Longer and severe
•
Last recession
Inflation Rates
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Food Price Inflation
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Headline Inflation

Core Inflation

Global Economy

Advanced Economies
World Economic Outlook