Transcript lessons to the financial crisis

WORLD
FINANCIAL CRISIS
Ana Lisón Blanco
Raquel Cavas Jover
Mª Cruz Bayona Jiménez
Ginesa Mª López Vázquez
STRUCTURE
1. Causes of the crisis.
2. Financial markets impacts.
3. The Euro-zone crisis.
4. Responses and lessons to the financial crisis.
1. CAUSES
OF THE CRISIS
CAUSES OF THE CRISIS
Factors caused the financial crisis.
1. The U.S. housing bubble:
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Between 1997 and 2006, the price of the American house
increased by 124%.

By September 2008, average housing prices had declined by
over 20 % from their mid-2006 peak.

The easy credit and the belief that house prices would
continue to appreciate made that in August 2008, 9.2% of all
mortgages were default.
CAUSES OF THE CRISIS
Factors caused the financial crisis.
1. The U.S. housing bubble:
CAUSES OF THE CRISIS
Factors caused the financial crisis.
2. Risk-taking behavior.

Many financial institutions didn´t have enough resources
to absorb the losses they had.
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These firms were a huge leveraged (high ratio of debt to
equity) or didn´t have enough capital.
CAUSES OF THE CRISIS
Factors caused the financial crisis.
3. Financial market factors

During a period of global growth and prolonged stability
market, participants looked for higher return without
evaluating the risk.

The bad practices risk management, the complex and opaque
financial products and the excessive leverage created
vulnerabilities in the system.
CAUSES OF THE CRISIS
Factors caused the financial crisis.
4. Other factors .

Interest rates: Low interest rates made bank lending more
profitable.

Instability of exchange rates: Coordination of exchange rate
policies is of extreme importance to improve economic growth.

BP imbalances: During the last years, the BP imbalances have
increased significantly.

Price volatility: The price of the commodities was increased and
the price of oil tripled from $50 to $140 from 2007 to 2008.
Nowadays its prices is $84.
2.FINANCIAL
MARKETS IMPACTS
IMPACTS ON FINANCIAL INSTITUTION
• The International Monetary Fund estimated that large U.S.
and European banks lost more than $2.8 trillion on toxic
assets and bad loans from 2007 to 10.
• One of the first victims was Northern Rock, a medium-sized
British bank. The highly leveraged of its business led the
bank to request security from the Bank of England.
• In February 2008, the British government having failed to
find a private sector buyer the bank was taken into public
hands.
• Initially the companies affected were those directly involved
in home construction and mortgage lending such as
Northern Rock and Countrywide Financial, as they could no
longer obtain financing through the credit markets.
• The financial institution crisis hit its peak on September and
October 2008. Several major institutions either failed, like
Lehman Brothers, Merrill Lynch, Freddie Mac, Washington
Mutual, Wachovia, and AIG.
CREDIT MARKET AND THE SHADOW
BANKING SYSTEM
• Withdrawal from money markets
were $144.5 billion during one
week, versus $7.1 billion the
week prior. This interrupted the
ability of corporations to replace
their short-term debt.
• On September 2008, Treasury
Secretary and Fed Chairman met
with key legislators to propose a
$700 billion emergency bailout.
• Major affected countries around the world
WEALTH EFFECTS
• There is a direct relationship between declines in wealth,
and declines in consumption and business investment.
• Housing prices had dropped 30-35% from their 2006 peak.
• U.S. home mortgage debt relative to GDP increased from
an average of 46% during the 1990s to 73% during 2008.
• To offset the decline in consumption and lending capacity,
the U.S. government and U.S. Federal Reserve have
committed $13.9 trillion.
• The Fed has gone from being the "lender of last resort" to
the "lender of only resort" for the economy. In some cases
the Fed can now be considered the "buyer of last resort."
EUROPEAN CONTAGION
• The crisis rapidly developed and spread into a global
economic shock, resulting in a number of European bank
failures, declines in various stock indexes, and large
reductions in the market value of equities and commodities.
• The de-leveraging of financial institutions, as assets were
sold to pay back obligations, accelerated the solvency crisis
and caused a decrease in international trade.
3. THE EURO-ZONE
CRISIS
THE ROOTS OF THE CRISIS
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Rapid credit growth
Low interest rates
Housing bubbles
Global imbalances
US-EU linked
WHY IS THE EURO AREA SO AFFECTED?
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US and Europe are closely connected
EU banks bought US ‘toxic’ assets
Sharp fall in German exports
Spanish and Irish housing bubbles burst
Euro area economy less flexible
One of the main causes of the
currency crisis in the Euro-zone is
that all countries have breached
their own self-imposed rules.
Under the Convergence Criteria
adopted as part of economic and
monetary union, government debt
must not exceed 60% of GDP at the
end of the fiscal year. In addition,
the annual government deficit must
not exceed 3% of GDP. However,
as the map shows, only 2 of the 16
Euro-zone countries (Luxembourg
and Finland) have managed to stick
to both rules.
Overall, Greece is the worst
country, with a deficit of 13.6% of
GDP, while Spain's deficit is 11.2%
of GDP. If the UK were in the Eurozone, it would also fall foul of the
criteria, with a deficit of 11.5% of his
GDP.
One of the impact of this crisis has
been
the
growth
of
the
unemployment in Euro-zone. In
September 2010, the area's overall
unemployment rate was more than
10%.
Spain has the worst unemployment
rate of the Euro area, with a jobless
rate that has doubled since 2008 - a
dramatic development for a country
that was one of Europe's biggest job
creators.
Slovakia, the Irish Republic, Portugal,
Greece and France all have doubledigit jobless rates that are above the
Euro-zone average, while the
Netherlands is the least afflicted,
with unemployment of around 4%.
The Euro-zone as a whole has
emerged from recession, but
recovery remains irregular and in
some cases, fragile.
Across the 16 nations that have
adopted the euro, growth was
0,4% on average between July
and September.
However, the picture is still
gloomy in the Irish Republic and
Greece, who have both had to
turn to European partners for
financial
aid,
and
whose
economies are still in recession.
EUROPE’S RESPONSE TO THE CRISIS
• ECB injected liquidity into European
banks unable to obtain short-terms
funds in market.
• Also, the ECB cut interest rates to
historically low levels.
• October 08: euro-area governments
adopted an action plan to support
their financial systems.
• Dec 08: EU governments adopted
the European Economic Recovery
Plan, a coordinated fiscal stimulus.
4. RESPONSES AND
LESSONS TO THE
FINANCIAL CRISIS
RESPONSES TO THE FINANCIAL CRISIS
• Providing liquidity by central banks and selectively
reducing interest rates
• Short-term measures of regulators
• Measures to reestablish confidence
• Measures to ensure the solvency of banks
• More complete information about the complex financial
instruments
• Assisting “emerging" countries
RESPONSES TO THE FINANCIAL CRISIS
• Deleveraging of banks / financial intermediaries
• Ensuring the solvency of banks by means of mergers
Some are :
- Caja Murcia, Caixa Pendes,
Sa Nostra y Caja Granada
- CAM, Cajastur+CCM,
Caja Cantabria y Caja de Extremadura
• The state has had to secure the financing of the banks
through explicit guarantees for private deposits and
other liabilities
RESPONSES TO THE FINANCIAL CRISIS
• Improvement of risk management in banks
• A bigger the regulation and control over the financial
system
• The three proposals of the Secretary of the Treasury of
the United States are:
Inject public capital in larger financial institutions
 Establish public-private mechanisms to buy risky assets from
banks.
 Create the Federal Reserve credit line to promote lending to
consumers and businesses

LESSONS TO THE FINANCIAL CRISIS
• In times of crisis and post-crisis,
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the surviving companies are which
have stronger competitive edge.
The companies with gaps will disappear.
As a result of the increase in unemployment exists great talent
available.
Almost always will be new business opportunities and growth.
Taking risks is part of the game, only those companies that survive
are able to control and manage.
Thank you
for your
attention