Unfolding of the Global Financial Crisis

Financial Crisis & the Global Economy
The global economy is now facing its worst prospects in more than half a century, with increasing financial losses, falling asset prices, and a deep downturn in real economic activity. Several developed economies including the US, UK, Japan and Germany are already in recession. Overall global GDP growth is projected to decline by the World Bank, from 2.5 per cent in 2008 to 0.9 per cent in 2009, the weakest since records became available in 1970. International trade would decelerate sharply, with global export volumes declining for the first time since 1982. As labor market conditions have deteriorated, consumer spending, business investment, and industrial production have also declined, the Federal Reserve lowered the target for its benchmark interest rate and established a target range for the federal funds rate of 0 per cent and 0.25 per cent. The European Commission in November unveiled an economic recovery plan worth €200bln.with aims to save further job losses, stimulate spending and boost consumer confidence. The ECB has reduced its key policy rate from 4.25 per cent in September to 2 per cent by mid-January. The British central bank has reduced interest rates four times since April from 5.0 per cent to 1.5 per cent. The latest half-percentage point cut in January 2009, that brings the rate to its lowest level in the central bank's 315-year history, was necessitated by weakening consumer spending, a tightening credit market for households and businesses, and a deteriorating business and residential investment outlook. Bank of Japan has cut interest rates from 0.5 per cent to 0.3 and then to 0.1 per cent by mid-December, and has adopted several liquidity enhancing measures. The Bank of Korea lowered its Base Rate from 5.00 per cent in early October to 2.50 per cent by January 2009. China has cut lending rates considerably since mid-September and unveiled a 4 trillion-yuan fiscal stimulus package in early November to rejuvenate the weakening economy. The Bank of Thailand cut the benchmark interest rate by 75 basis points to 2 per cent in January, the decision, which follows a 1-percentage point reduction in December, is more aggressive than expected.

In early September, mortgage lenders Fannie Mae and Freddie Mac, which account for nearly half of the outstanding mortgages in the US, were rescued by the US government in one of the largest bailouts in US history. Lehman Brothers filed for bankruptcy protection, becoming the first major bank to collapse since the start of the credit crisis. . During this time US bank Merrill Lynch, agreed to be taken over by Bank of America for $50mln. to avoid bankruptcy. The US Federal Reserve announced an $85mln. rescue package for AIG, the country's biggest insurance company, to save it from bankruptcy, in return for an 80 per cent public stake in the firm. Following a run on its shares Britain's biggest mortgage lender HBOS was taken over by Lloyds TSB in a £12mln. deal creating a banking giant holding close to one-third of the UK's savings and mortgage market. Soon after, Washington Mutual, the giant mortgage lender which had assets valued at $307mln., hit by mortgage defaults was closed down by regulators and sold to JPMorgan Chase. By the end of September, the credit crunch hit Europe's banking sector as the European banking and insurance giant Fortis is partly nationalised to ensure its survival. This was followed by a wave of nationalisations and government bailouts, as well as increased deposit gurantees for major European banks and mortgage lenders.
The UK government announced plans to pump £37bln. In to three UK banks Royal Bank of Scotland (RBS), Lloyds TSB and HBOS, in one of the UK's biggest nationalisations. The US government unveiled a $250mln. plan to purchase stakes in a wide variety of banks in an effort to restore confidence in the sector. South Korea announced a $130mln. financial rescue package to stabilise its markets - by offering a state guarantee on banks' foreign debts and promising to inject capital into struggling financial firms if necessary. The Dutch government injected €10bln into the banking and insurance company ING; the government had earlier announced the establishment of a €20bln fund to protect the financial sector from the credit crisis. Sweden's government announced credit guarantees to banks and mortgage lenders up to 1.5 trillion kroner ($205 bln.) and also set aside 15 bln. kroner as a bank stabilisation fund. In end November again, the US government announced a $20 bln. rescue plan for troubled banking giant Citigroup after its shares plunged by more than 60 per cent in a week. The US Treasury created the capital purchase program as part of the Troubled Asset Relief Program (TARP) and allocated $250 bln. under the program to invest in US financial institutions; this is the first time the US Treasury has recapitalized private banks. Towards end November, Pakistan and Iceland received emergency loans from IMF, Iceland being the first western European nation to require an IMF loan since 1976, due to the failure of of Landsbanki and Ghitmir, the second and third largest Iceland banks.
See www.ecofin-surge.co.in to read about the unfolding of the Financial crisis.