MANAGERIAL ECONOMICS global financial crisis management

Global Financial Crisis: A Catalyst for change in Global Economic Paradigm Professor B.. • Factors affecting Economic Supremacy of a Country • Position of USA till 2008 and current pr

Global Financial Crisis: A Catalyst for change in Global

Economic Paradigm

Professor B P Singh

Chairman Delhi School of Professional Studies & Research

Formerly, Head & Dean Faculty of Commerce & Business

Delhi School of Economics

University of Delhi

Delhi

Agenda For Presentation

• Anatomy of the Downturn : Cause and Effect

• How it has been managed?

• Factors affecting Economic

Supremacy of a Country

• Position of USA till 2008 and

current predictions in the wake of current meltdown

• Changing outlook for 2009 – 10

• Acquisitions and Restructuring

• Policy Goals: What States Want From Restructuring

Anatomy of the downturn

A closer look at the global ‘credit crunch’

The ‘credit

crunch’ may have

its roots in the

US, but it’s now a

Importantly, the Australian banking system, which is more regulated than that in the US, has held up very well

January 2008

March 2007

in an ‘emergency’ rescue deal

US Federal Reserve provides US$200 billion to commercial banks in another bid to free up market liquidity in addition to

$700 billion announced by US Govt to rescue wall street.

April 2008

International Monetary Fund warns losses related to the ‘credit crunch’ could top US$1 trillion

September 2008

7 September 2008: US government seizes control of

mortgage lenders Fannie Mae and Freddie Mac

15 September 2008: Lehman Brothers files for

bankruptcy Merrill Lynch is bought by Bank of America for US$50 billion

16 September 2008: American International Group

(AIG), the US’s biggest insurer, receives an US$85

billion loan from the US Federal Reserve to stave off

bankruptcy

28 September 2008: US bank, Washington Mutual, is seized by US regulators in the biggest US bank failure in history

September 2008

28 September 2008

Britain, Belgium & the Netherlands are

forced to bail out several major banks

US govt Announces US$700 billion plan

to rescue Wall Street

US House of Representatives narrowly

rejects the US$700 billion bailout plan by

a vote of 228-205, sending global share

markets tumbling

29 September 2008

Citigroup bids for US bank Wachovia in

a deal backed by US authorities

30 September 2008

$55 billion dollars is wiped off the

Australian share market in a single day

One day later, the market recovers by more than 4%

3 October 2008: After a second vote, the

US House of Representatives passes the US$700 billion bailout plan

6 - 10 October 2008: Concerns that bailout plan won’t prevent a global recession

sends global shares sliding:

The list of casualties kept growing….

In this way… it has been managed

Economic Supremacy of a Country depends upon its state in terms of Hard and Soft Power

In 2007 2020, 2030

Weight of US Economy on the Skids

Since 2000

Source: IMF, World Economic Outlook DB, Oct, 2008

Growth Rate Predictions….

Source: IMF, World Economic Outlook, 2008

• Since the early 20th

century, the US has

been the top

economic power in

the world

- World’s largest

consumer market

• The US’s economic

weight has fallen

Position of USA

till 2008

Predictions in the wake of

Current Meltdown

- Euro: 2-3% 1-2% growth (shrinking labor population)

- Japan: 1-2% growth (rapidly aging population)

- China: 6-7% growth 4-5% growth from 2020 (declining economically active population

& slowing productivity growth)

Position of USA

till 2008 (Cont…)

Predictions in the wake of Current Meltdown (Cont…)

- IMF predicts China

will overtake Japan

in 2010 to become

the No 2 economy

- India: 6-7% growth (growing population and productivity improvement)

• As early as 2026, China may replace the US as the world’s largest economy

• India is expected to overtake Japan in 2023

• Economic weight of BRICs will continue to rise

• US holds dominant position

in all areas that create

financial power; financial

hub, center of financial

assets & institutions

- US holds 56.1% of the

world’s financial assets

• 34% of bonds (as of 2006)

• Stock market capitalization:

4.5 times that of Japan, the

world’s second-largest

market

• Financial power of Europe and emerging countries will

strengthen

- Significant advancement expected

in sovereign wealth funds and emerging countries

Position of USA

till 2008 (Cont…)

Predictions in the wake of Current Meltdown (Cont…)

- Among the world’s

ten major banks,

three are US banks

- New York is the

global financial hub

- In the wake of the financial crisis, the US financial industry will undergo a temporary contraction

Position of USA

till 2008 (Cont…)

Predictions in the wake of Current Meltdown (Cont…)

• US maintains financial

power based on its key

currency status and

advanced financial acumen

- US Dollar Recycling

Mechanism

• US’s current account

deficit Increasing liquidity

in countries with current

account surplus Swelling

foreign currency reserves of

these countries

Investment in the US

- US will continue to hold competitiveness thanks to large comprehensive

financial groups

• Commercial banks & investment banks combined

Position of USA

till 2008 (Cont…)

Predictions in the wake of Current Meltdown (Cont…)

• Impact of China’s rapidly growing financial power will be limited to Asia

Position of USA

till 2008 (Cont…)

Predictions in the wake of Current Meltdown (Cont…)

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)

*

Source : “The Implications of the Global Financial Crisis for

Low-Income Countries”, International Monetary Fund, March 2009 LICs = Low Income Countries

Note : The Economic Power Index (EPI) represents scores based on the sum 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 2030

Economic Power Index

Global Financial Crisis: A Catalyst for Change in Global Economic Paradigm

• The global financial crisis paved the way for China 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

international monetary system

• Emerging Polarity

– The US maintains the largest clout in the

world : thanks to its defence and

– Backed by its huge economic scale, China

will likely play the role of the epicentre of

Asia and emerging markets.

• The next 20 years (2010-2030) will be

a period 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.

• The biggest uncertainty shall lay on

how China and India will evolve in

terms of their diplomatic relations in

the future

– The most important variable in this

relationship would depend upon how

China’s political and economic systems will grow and take shape.

Cost of Bankruptcy…

Bankruptcy – Historical Vignettes 

• The penalty for declaring bankruptcy in Ancient Rome was slavery or being cut to pieces The

choice was left to the creditor By the Middle

Ages, the treatment of insolvent debtors had

• In French medieval cities, bankrupts were

required to wear a green cap at all times, and

anyone could throw stones at them  

- Source: World Bank, Doing Business in 2004

Restructuring of the Economy :

A Remedy

• To promote recovery in a

crisis-affected economy, it is essential to

link together a restructuring of the

financial and the corporate

sectors, a so-called rapid sequencing

restructuring of the economy.

• Restructuring ownership structure, leverage

–Exchange offers

–Share repurchases

–LBO (Leveraged buyouts)

– LCO’s (Leveraged cashouts)

 Occurs within the hierarchy.

 Terms and valuation of the assets are set

internally

 Parent stockholders create new board & TMT.

 Parent can maintain ties with spun-off unit.

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 governs the sold-off assets as part of its

hierarchy.

Which way is the best to

Restructure……

is always based on the

objectives of Restructuring…

Policy Goals: What States Want From Restructuring 

RESIDENTIAL AND SMALL

UNECONOMIC “STRANDED COSTS”

(RELIABILITY, LOW-INCOME

ASSISTANCE, CONSERVATION &

RENEWABLES)

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