BY HAMIMAH HASSAN

INTRODUCTION
PURPOSE:
1. TO PROVIDE BACKGROUND OF GLOBAL

ECONOMIC CRISIS
2.TO EXPLAIN INDICATORS OF ECONOMIC

RECOVERY

THE ECONOMIC CRISIS

17th century -Tulip mania (1637) 18th century -South Sea Bubble (1720), Panic of 1792 19th century E.G Panic of 1825, a pervasive British recession in which many

banks failed, nearly including the Bank of England, Panic of 1857, a U.S. recession with bank failures, Long Depression (1873-1896) 20th century Panic of 1907, a U.S. economic recession with bank failures Wall Street Crash of 1929 and Great Depression (1929-1939) the worst depression of modern history OPEC oil crisis, Secondary banking crisis of 19731975 in the UK Japanese asset price bubble (19862003), 1994 economic crisis in Mexico 1997 Asian financial crisis, 1998 collapse of Long-Term Capital Management 1998 Russian financial crisis, Argentine economic crisis (19992002) 21st century Financial crisis of 20072009, including: Global financial crisis of 20082009 20082009 Icelandic financial crisis 200809 Irish banking crisis Russian financial crisis of 20082009

The backgroud
The financial crisis of 20072009 has been called the

most serious financial crisis since the Great Depression by leading economists The crisis began in the United States and spread to other parts of the world ( given the fact that US has the largest economy globally)

Contributors to failure in the US economy

HOUSING BUBBLES
CREDIT BUBBLES COMMODITY BUBBLES

1. HOUSING BUBBLES
bursting of the United States housing bubble peaked in approximately 20052006 causing by high default rates on "subprime" and adjustable rate mortgages (ARM)
(subprime refers to the credit quality of particular

borrowers, who have weakened credit histories and a greater risk of loan default than prime borrowers)

Whose out?
COUNTRYWIDE was sued for "Unfair Business

Practices" and "False Advertising"

2. CREDIT BUBBLES
From housing, the situation led to credit bubbles
Investment banks, hedge funds and certain

regulated banks had assumed significant debt burdens and did not have a financial cushion sufficient to absorb large loan defaults or MBS (morgate back securities) losses. These losses impacted the ability of financial institutions to lend, slowing economic activity.

Cont
AIG, an insurance company insured obligations of

various financial institutions through the usage of credit default swaps

However, AIG was lacked of financial strenght when

many financial instutions faced loan defaults

Innovative financial products turned disaster

Banks offers products (e.g the adjustable-rate mortgage; the bundling of subprime mortgages into mortgage-backed securities (MBS) or collateralized debt obligations (CDO)) for sale to investors, and also a type of securitization; and a form of credit insurance called credit default swaps(CDS). Its financial risks were difficult to be assessed resulting to consumers to rely on the banks definition of risk management

Whose out/down?
Lehman Brothers was liquidated
Bear Stearns and Merrill Lynch were sold at fire-sale

prices Goldman Sachs and Morgan Stanley (formerly an investment banks) became commercial banks, subjecting themselves to more stringent regulation AIG was taken over by US govt

3. Commodity bubble
A commodity price bubble was created following the collapse in the housing bubble. The price of oil nearly tripled from $50 to $140 from early 2007 to 2008, before plunging as the financial crisis began to take hold in late 2008. The causes; an increase in oil prices tends to divert a larger share of consumer spending into gasoline, which creates downward pressure on economic growth in oil importing countries, as wealth flows to oil-producing states

THE BAIL OUT

The Emergency Economic Stabilization Act of

2008, commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the subprime mortgage crisis authorizing the US States Secretary of Treasure to spend up to US$700 billion to purchase distressed assets, especially mortgagebacked securities, and make capital injections into banks. Both foreign and domestic banks are included in the bailout. The Federal Reserve also extended help to American Express, whose bank-holding application it recently approved

ECONOMIC STIMULUS PACKAGE- $152 billion for 2008

The law provides for tax rebates to low- and middle-

income U.S. taxpayers

tax incentives to stimulate business investment an increase in the limits imposed on mortgages

eligible for purchase by government-sponsored enterprises

THE GLOBAL SPREAD

a number of European bank failures, declines in various

stock indexes, and large reductions in the market value of equitiesand commodities the de-leveraging of financial institutions, as assets were sold to pay back obligations that could not be refinanced in frozen credit markets, further accelerated the liquidity crisis and caused a decrease in international trade. At the end of October 2008 a currency crisis developed, with investors transferring vast capital resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading many emergent economies to seek aid from the International Monetary Fund (IMF)

In Japan, UK..
In Japan, banks and insurers announced a combined

249 billion yen ($2.4 billion) in potential losses tied to the collapse of Lehman In UK, a lawyer from The Royal Bank of Scotland Group said the company is facing between $1.5 billion and $1.8 billion in claims against Lehman partially based on an unsecured guarantee from Lehman and connected to trading losses with Lehman subsidiaries

In Hong Kong
In Hong Kong more than 43,700 individuals in the city

have invested in HK$15.7 billion of "guaranteed minibonds" from Lehman, in which many claim that banks and brokers mis-sold them as low-risk.
In October 2008, the Hong Kong Association of Banks,

agreed to buy back the bonds, which will be priced using an agreed upon methodology based on its estimated current value

EMPLOYMENT
In the US, by end of 2008, the unemployment rate rose

to 6.7 percent , where 533,000 people lost their jobs

In Feb. 2009: Japan's Panasonic Corp. was cutting up to

15,000 jobs and closing dozens of plants worldwide as it braces to fall deep in the red due to the global economic crisis.

 In the UK, since 2006 till October 2008, British

companies have confirmed the loss of 154,266 jobs.

REBOUND?
Goldman Sachs, the iconic investment bank, turned itself

into a commercial bank holding company in September 2008 and managed to survive Wall Street's meltdown with the help of a federal bailout. By April 2009, Goldman announced that it was healthy enough that it would seek to raise new capital and return the money it had received from the government

On June 17 2009, Goldman Sachs repaid govt USD 10

billion and became one of 10 banks to repay about $68 billion in bailout funds received from the Troubled Asset Relief Program.

HAS THE GLOBAL ECONOMY RECOVERED?

Growth in developed economies, including the USA

and the eurozone, are forecast to rise substantially in 2010 and 2011 as the housing and credit markets begin to improve.
In the USA, the world's largest economy, real GDP

growth is projected to be 2.0% in 2010 compared to 0.1% in 2009;

IN ASIA?
The major developing economies, including China and

India, are also set to experience a noteworthy slowdown in growth over 2008-2009, perhaps more than had previously been expected.
In Developing Asia, growth is projected to rise to 8.4%

in 2010 after reaching 7.7% in 2009 and stabilise at around 8.5% per year in 2011-2012;

HOW ASIA WAS AFFECTED? EXPORT?

Over the years, Asia has become integrated into a

global supply chain. So, a large fraction of trade within the region reflects intra-industry processing and assembly through vertically integrated production chains. the total trade exposure of Asia to the United States and Europe has increased over time. And because exports are such a high share of Asia's GDP, the region is actually more exposed to shocks in advanced economies than other regions.

HOW ASIA WAS AFFECTED? ASIAS FINANCIAL INSTITUTIONS?

Asian financial institutions entered the global

financial crisis with limited exposure to subprimerelated instruments, and most had relatively healthy financial positions and strong capital buffers.
Still, the dramatic increase in Asian participation in

international financial markets has led to several channels of transmission of the global financial turmoil to the region.

IN MIDDLE EAST?
The outlook for the Middle East is the most stable of

all regions (thanks to the knock-on effects of high oil prices, which have created large amounts of liquidity) However, growth is still set to slow from 2009 and other problems, particularly high inflation and an overdependence on uncertain hydrocarbon revenues, will threaten prospects. Some parts of the region, for instance the UAE, have also been hugely reliant on foreign capital and credit, the scarcity of which is now likely to contribute to a slowdown

Inflation: A key factor in determining the economic outlook

Globally, the IMF predicts that inflation will peak at

6.2% in 2008 before falling to 4.6% in 2009 and dipping further until 2012. Although most economies will follow this trend, inflation will remain highest in developing countries. For instance by 2010, inflation will still be 11.3% in the Middle East and 10.2% in the Commonwealth of Independent States (CIS) and Mongolia. This is mainly due to excess liquidity generated from the export of commodities, chiefly oil and minerals, which is being reinvested domestically and is rapidly adding to local money supply

CONCLUSION
The economic downturn which began in 2007 and will

continue through 2009 is expected by many analysts to be amongst the most severe in the past 100 years.
While the scale of the downturn remains uncertain, the full

impact on the real economy has not yet been felt

Although a global rebound is expected in 2010, even

emerging economies have proven considerably more vulnerable than previously believed, demonstrating the integrated nature of global financial and credit markets.

CONCLUSION
Real GDP growth in more advanced markets such as

the USA or UK is projected to rebound from 2009 and stabilise by 2012. Meanwhile, the longer-term trend in key developing markets such as China or India will be a gradual slowdown in growth over the same period. Inflation forecasts are clouded with uncertainty and commodity prices especially those of oil will play a key role in determining the growth outlook for most countries.

CONCLUSION
Regulation in the financial and banking markets is

likely to be overhauled in order to prevent a similar crisis reoccurring in the future.

Government intervention is set to dramatically alter

the banking and financial landscape, at least in the medium-term, and prompt ongoing volatility and uncertainty amongst businesses and consumers worldwide

WORLDS GDP GROWTH

NEGATIVE AND MINIMAL GROTH IN 2009
MINIMAL POSITIVE GROWTH BEGINNING 2010

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