Presentation on theme: "Professor B. P. Singh Chairman"— Presentation transcript:
1 Global Financial Crisis: A Catalyst for change in Global Economic Paradigm Professor B. P. SinghChairmanDelhi School of Professional Studies & ResearchFormerly, Head & DeanFaculty of Commerce & BusinessDelhi School of EconomicsUniversity of DelhiDelhi
2 Agenda For Presentation Anatomy of the Downturn : Cause and EffectHow it has been managed?Factors affecting Economic Supremacy of a CountryPosition of USA till 2008 and current predictions in the wake of current meltdownChanging outlook for 2009 – 10
3 Cont…Global Financial Crisis: A Catalyst for change in Global Economic ParadigmCost of BankruptcyRestructuring of the Economy: A RemedyDimensions of RestructuringAcquisitions and RestructuringPolicy Goals: What States Want From Restructuring
4 Anatomy of the downturn A closer look at the global ‘credit crunch’
5 Governments in Great Britain, Belgium, the Netherlands & even Iceland have been forced to bail out some of their biggest banksThe ‘credit crunch’ may have its roots in the US, but it’s now a global problemThe Rudd Government has moved to protect bank deposits for the next 3 yearsImportantly, the Australian banking system, which is more regulated than that in the US, has held up very well
6 Anatomy of a downturn a closer look at the global ‘credit crunch’ January 2008March2007US Federal Reserve cutsinterest rates to 0.75% amidfears the US economy couldfall into recessionJP Morgan buys US investment bank Bear Stearns in an ‘emergency’ rescue dealUS 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.
7 Cont...April 2008International Monetary Fund warns losses related to the ‘credit crunch’ could top US$1 trillion
8 Cont...September 20087 September 2008: US government seizes control of mortgage lenders Fannie Mae and Freddie Mac15 September 2008: Lehman Brothers files for bankruptcy. Merrill Lynch is bought by Bank of America for US$50 billion16 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 bankruptcy28 September 2008: US bank, Washington Mutual, is seized by US regulators in the biggest US bank failure in history
9 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 StreetUS House of Representatives narrowly rejects the US$700 billion bailout plan by a vote of , sending global share markets tumbling29 September 2008Citigroup bids for US bank Wachovia in a deal backed by US authorities30 September 2008$55 billion dollars is wiped off the Australian share market in a single dayOne day later, the market recovers by more than 4%
10 Cont...October 20083 October 2008: After a second vote, the US House of Representatives passes the US$700 billion bailout planOctober 2008: Concerns that bailout plan won’t prevent a global recession sends global shares sliding:Japan -24.3%Europe -22.2%UK %US -18.2%Australia -15.6%
11 The list of casualties kept growing…. In this way… it has been managed
12 Economic Supremacy of a Country depends upon its state in terms of Hard and Soft Power
14 Weight of US Economy on the Skids Since 2000 Source: IMF, World Economic Outlook DB, Oct, 2008
15 Growth Rate Predictions…. Source: IMF, World Economic Outlook, 2008
16 Predictions in the wake of Current Meltdown Position of USA till 2008Predictions in the wake of Current MeltdownSince the early 20th century, the US has been the top economic power in the world.- World’s largest consumer marketThe US’s economic weight has fallen steadily since 2000.2000: 32% 2007: around 25%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
17 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 (Global economy grew 3.3%)- Weight of BRICs: 5.3% in % in 2007Emerging countries will lead the global economic growth.US: 2-3% growth (inflow of immigrants and productivity improvement)Euro: 2-3% % growth (shrinking labor population)Japan: 1-2% growth (rapidly aging population)China: 6-7% growth % growth from 2020 (declining economically active population & slowing productivity growth)
18 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 % in % in 2030
19 Position of USA till 2008 (Cont…) Predictions in the wake of Current Meltdown (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 assets34% of bonds (as of 2006)Stock market capitalization: 4.5 times that of Japan, the world’s second-largest marketFinancial power of Europe and emerging countries will strengthen.- Significant advancement expected in sovereign wealth funds and emerging countries
20 Position of USA till 2008 (Cont…) Predictions in the wake of Current Meltdown (Cont…)Among the world’s ten major banks, three are US banksNew York is the global financial hubExcept for London, most other financial hubs specialize in narrow financial servicesAbsolute 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
21 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 MechanismUS’s current account deficit Increasing liquidity in countries with current account surplus Swelling foreign currency reserves of these countries Investment in the USUS will continue to hold competitiveness thanks to large comprehensive financial groupsCommercial banks & investment banks combined
22 Position of USA till 2008 (Cont…) Predictions in the wake of Current Meltdown (Cont…)US has quality workforce, core factor of financial industryFinancial 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
23 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)
24 Cont….Source : “The Implications of the Global Financial Crisis for Low-Income Countries”, International Monetary Fund, March 2009.LICs = Low Income Countries
26 An Emerging Polarity in Global Structure by 2030 Economic Power IndexNote : 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.
27 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
28 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.
29 Cont…..The next 20 years ( ) 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.
30 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.
31 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
32 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.
33 Dimensions of restructurings Asset restructuringAcquisitionsDivestituresSpin offsCorporate downsizingOutsourcingAsset restructuring has to do with what activities are going to be done within the legal structure of the firm. Could entail the details of the corporate structure: divisions, subsidiaries, etc. In particular, acquisitions that are diversification oriented are moving the corporation into new industries, etc. Divestitures/spin off/split ups of divisions of a corporation alter the different businesses the firm owns and operates in. Corporate downsizing and outsourcing are catch-all phrases, but are often connected with the activities in the work flow that go into the production of finished products and services that can either be done within the corporation or can be contracted with third parties. Examples: franchising vs. ownership, outsourcing HR, licensing arrangements, etc.We will not focus as much on the mergers and acquisitions side of restructuring, because these decisions are treated in many other courses.
34 Cont…. Restructuring ownership structure, leverage Exchange offers Share repurchasesLBO (Leveraged buyouts)LCO’s (Leveraged cashouts)Ownership restructuring: changes in the ownership structure of the corporation. This could be as basic as significant capital structure changes, such as large scales stock repurchases or leveraged recapitalizing dividends. Again, we will not focus much on simple stock repurchase plans or leveraged recapitalizations because these receive enough attention in Financial Decisions.
35 Acquisitions and Restructuring Corporate RestructuringDivestitures (sell-offs versus spin-offs)Spin-offSpin-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 internallyParent stockholders create new board & TMT.Parent can maintain ties with spun-off unit.
36 Cont…Sell-offSell-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.
37 Which way is the best to Restructure…… is always based on the objectives of Restructuring…..
38 Policy Goals: What States Want From Restructuring ENSURE OPPORTUNITY FOR RESIDENTIAL AND SMALL BUSINESS PARTICIPATIONENCOURAGE GROWTH OF EFFICIENT, COMPETITIVE GENERATION OF MARKETACHIEVE BROAD CUSTOMER & NEW ALTERNATIVE SUPPLIER PARTICIPATION