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
Cont…
• Global Financial Crisis: A Catalyst for
change in Global Economic Paradigm
• Cost of Bankruptcy
• Restructuring of the Economy:
A Remedy
• Dimensions of Restructuring
• Acquisitions and Restructuring
• Policy Goals: What States Want From
Restructuring
Anatomy of the downturn
A closer look at the global ‘credit crunch’
Governments in Great
Britain, Belgium, the
Netherlands & even Iceland
have been forced to bail out
some of their biggest banks
The ‘credit
crunch’ may have
its roots in the
US, but it’s now a
global problem
The Rudd Government has
moved to protect bank
deposits for the next 3 years
Importantly, the Australian
banking system, which is
more regulated than that in
the US, has held up very well
Anatomy of a downturn
a closer look at the global ‘credit crunch’
January
2008
US Federal
Reserve cuts
interest rates to
0.75% amid
fears the US
economy could
fall into
recession
March
2007
JP Morgan buys US
investment bank Bear Stearns
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.
Cont...
April
2008
International Monetary Fund warns
losses related to the ‘credit crunch’
could top US$1 trillion
Cont...
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
Cont...
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%
Cont...
October
2008
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:
Japan -24.3%
Europe -22.2%
UK - 21.0%
US -18.2%
Australia -15.6%
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
Position of USA
till 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
steadily since 2000.
- 2000: 32% 2007:
around 25%
Predictions in the wake of
Current Meltdown
• Global Economy is expected
to slow down.
- Despite a rise in productivity
driven by technical innovation,
global economic growth will
slow overall due to aging
population and shrinkage in
economically active population
Position of USA
till 2008 (Cont…)
Predictions in the wake of
Current Meltdown (Cont…)
• Emerging
economies, including
BRICs, are growing
rapidly.
- Average growth of
6.9% during 20022007 (Global
economy 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 of
immigrants and productivity
improvement)
- 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…)
• China
showed
especially
fast
growth.
- Annual average
growth of 10% since
entering WTO in
2001
- 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.
- 16.1% in 2010
25.1% in
2020 31.7% in 2030
Position of USA
till 2008 (Cont…)
• 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
Predictions in the
wake of Current
Meltdown (Cont…)
• 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
• Except for
London, most
other financial
hubs specialize in
narrow financial
services
• Absolute financial power of
the US will weaken but its
superior status will continue.
- In the wake of the financial
crisis, the US financial industry
will undergo a temporary
contraction
Position of USA
till 2008 (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
Predictions in the
wake of Current
Meltdown (Cont…)
- 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…)
- US
has
quality
workforce,
core
factor of financial
industry
• Financial
crisis
caused contraction in
US
investment
banks.
• Financial power will be
divided between the US and
Europe.
• Impact of China’s rapidly
growing financial power will be
limited to Asia
Changing outlook for 2009
*
Source : “The Implications of the Global Financial Crisis for LowIncome Countries”, International Monetary Fund, March 2009.
LICs = Low Income Countries (WEO: World Economic Outlook)
Cont….
Source : “The Implications of the Global Financial Crisis for LowIncome Countries”, International Monetary Fund, March 2009.
LICs = Low Income Countries
An Emerging Polarity in Global Structure by 2030
Economic Power Index
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.
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
Cont.…
• Emerging Polarity
– The US maintains the largest clout in the
world : thanks to its defence and
technological superiority.
– Once becomes politically integrated, Europe
will emerge as a key force in international
peace and mediation work on the back of its
soft power and new values.
– Backed by its huge economic scale, China
will likely play the role of the epicentre of
Asia and emerging markets.
Cont…..
• 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.
Cont….
• 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 softened
considerably.
• In Northern Italy, bankrupt debtors hit their naked
backsides against a rock three times before a jeering
crowd and cried out, “I declare bankruptcy.”
• 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.
Dimensions of restructurings
• Asset restructuring
–Acquisitions
–Divestitures
–Spin offs
–Corporate downsizing
–Outsourcing
Cont….
• Restructuring ownership structure,
leverage
–Exchange offers
–Share repurchases
–LBO (Leveraged buyouts)
– LCO’s (Leveraged cashouts)
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 set
internally
 Parent stockholders create new board & TMT.
 Parent can maintain ties with spun-off unit.
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 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
• ENSURE OPPORTUNITY FOR
RESIDENTIAL AND SMALL BUSINESS
PARTICIPATION
• ENCOURAGE GROWTH OF EFFICIENT,
COMPETITIVE GENERATION OF
MARKET
• ACHIEVE BROAD CUSTOMER & NEW
ALTERNATIVE SUPPLIER
PARTICIPATION
Cont….
• ADDRESS TRANSITIONAL
UNECONOMIC “STRANDED COSTS”
• RETAIN SYSTEM BENEFITS
(RELIABILITY, LOW-INCOME
ASSISTANCE, CONSERVATION &
RENEWABLES)
Thank You All For the Patient Listening !
For Further Queries Contact us at :
drbpsingh1958@gmail.com