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Global financial crisis: five key stages 20072011

From sub-prime mortgages in 2007 to the newly downgraded US debt status, the latest crisis point is unlikely to be the last 9 August 2007. 15 September 2008. 2 April 2009. 9 May 2010. 5 August 2011. From sub-prime to downgrade, the five stages of the most serious crisis to hit the global economy since the Great Depression can be found in those dates. Phase one on 9 August 2007 began with the seizure in the banking system precipitated by BNP Paribas announcing that it was ceasing activity in three hedge funds that specialised in US mortgage debt. This was the moment it became clear that there were tens of trillions of dollars worth of dodgy derivatives swilling round which were worth a lot less than the bankers had previously imagined. Nobody knew how big the losses were or how great the exposure of individual banks actually was, so trust evaporated overnight and banks stopped doing business with each other. It took a year for the financial crisis to come to a head but it did so on 15 September 2008 when the US government allowed the investment bank Lehman Brothers to go bankrupt. Up to that point, it had been assumed that governments would always step in to bail out any bank that got into serious trouble: the US had done so by finding a buyer for Bear Stearns while the UK had nationalised Northern Rock. When Lehman Brothers went down, the notion that all banks were "too big to fail" no longer held true, with the result that every bank was deemed to be risky. Within a month, the threat of a domino effect through the global financial system forced western governments to inject vast sums of capital into their banks to prevent them collapsing. The banks were rescued in the nick of time, but it was too late to prevent the global economy from going into freefall. Credit flows to the private sector were choked off at the same time as consumer and business confidence collapsed. All this came after a period when high oil prices had persuaded central banks that the priority was to keep interest rates high as a bulwark against inflation rather than to cut them in anticipation of the financial crisis spreading to the real economy. The winter of 2008-09 saw co-ordinated action by the newly formed G20 group of developed and developing nations in an attempt to prevent recession turning into a slump. Interest rates were cut to the bone, fiscal stimulus packages of varying sizes announced, and electronic money created through quantitative easing. At the London G20 summit on 2 April 2009, world leaders committed themselves to a $5tn (3tn) fiscal expansion, an extra $1.1tn of resources to help the International Monetary Fund and other global institutions boost jobs and growth, and to reform of the banks. From this point, when the global economy was on the turn, international cooperation started to disintegrate as individual countries pursued their own agendas.

9 May 2010 marked the point at which the focus of concern switched from the private sector to the public sector. By the time the IMF and the European Union announced they would provide financial help to Greece, the issue was no longer the solvency of banks but the solvency of governments. Budget deficits had ballooned during the recession, mainly as a result of lower tax receipts and higher non-discretionary welfare spending, but also because of the fiscal packages announced in the winter of 2008-09. Greece had unique problems as it covered up the dire state of its public finances and had difficulties in collecting taxes, but other countries started to become nervous about the size of their budget deficits. Austerity became the new watchword, affecting policy decisions in the UK, the eurozone and, most recently in the US, the country that stuck with expansionary fiscal policy the longest. Last Friday, the morphing of a private debt crisis into a sovereign debt crisis was complete when the rating agency, S&P, waited for Wall Street to shut up shop for the weekend before announcing that America's debt would no longer be classed as top-notch triple A. This could hardly have come at a worse time, and not just because last week saw the biggest sell-off in stock markets since late 2008. Policymakers are confronted with a slowing global economy and a systemic crisis in one of its component parts, Europe. To the extent that they are united, they are united in stupidity, wedded to blanket austerity that will make matters worse not better. And they have yet to tackle the issue that lay behind the 2007 crisis in the first place, the imbalances between the big creditor nations such as China and Germany, and big debtors like the US. In the circumstances, it is hard to be wildly optimistic about how events will play out. Markets are bound to remain highly jittery, although it seems unlikely that American bond yields will rocket as a result of the S&P downgrade. Japan lost its triple A rating long ago and has national debt well in excess of 200% of GDP but its bond yields remain extremely low. The reason for that is simple: Japan's growth prospects are poor. So are America's, which is why bond yields will remain low in what is still, for the time being, the world's biggest economy. The dressing down given to Washington by Beijing following the S&P announcement was, however, telling. Growth rates of close to 10% mean that the moment China overtakes the US is getting closer all the time, and the communists in the east now feel bold enough to tell the capitalists in the west how to run their economies. Whatever it means for financial markets this week, 5 August 2011 will be remembered as the day when US hegemony was lost. All this is terrible news for Barack Obama. He has not delivered economic recovery. The US is drowning in negative equity and foreclosed homes. No president since Roosevelt has won an election with unemployment as high as it is today. Fiscal policy will be tightened over the coming months as tax breaks expire and public spending is cut. The Federal Reserve only has the blunt instrument of QE with which to stimulate the economy, and will only be able to deploy it after a softening up process for the markets that will take several months. On top of that, Obama will now be branded as the president who presided over the national humiliation of a debt downgrade. He looks more like Jimmy Carter than FDR. Not that the Europeans should get too smug about this, because what we are witnessing is not just the decline of the US but the decline of the west. One response to last week's meltdown was

the announcement of talks between the G7 the US, the UK, Germany, Italy, France, Canada and Japan but while this would have been appropriate 20 years ago it is not going to calm markets today. Holding a G7 meeting without China today is like expecting the League of Nations without the US to tackle totalitarianism in the 1930s. There is no happy ending to this story. At best there will be a long period of weak growth and high unemployment as individuals and banks pay down the excessive levels of debt accumulated in the bubble years. At worst, the global economy will be plunged back into recession next year as the US goes backwards and the euro comes apart at the seams. The second, gloomier scenario, looks a lot more likely now than it did a week ago. Why? Because there is no international co-operation. There are plans for austerity but no plans for growth. Even countries that could borrow money for fiscal stimulus packages reluctant to do so. Europe lacks the political will to force the pace of integration necessary to avoid disintegration of the single currency. Commodity prices are coming down, but that is the only good news. We are less than halfway through the crisis that began on 9 August 2007. That crisis has just entered a dangerous new phase. LATE-2000 FINANCIAL CRISIS
The late-2000s financial crisis (often called the global recession, global financial crisis or the credit crunch) is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s.[1] It resulted in the collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets around the world. In many areas, the housing market also suffered, resulting in numerous evictions, foreclosures and prolonged unemployment. It contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, and a significant decline in economic activity, leading to a severe global economic recession in 2008.[2]

The key question confronting the economy now is the backwash effect of the American (or global) financial crisis. Central banks in several countries, including India [ Images ], have moved quickly to improve liquidity, and the finance minister has warned that there could be some impact on credit availability. That implies more expensive credit (even public sector banks are said to be raising money at 11.5 per cent, so that lending rates have to head for 16 per cent and higher -- which, when one thinks about it, is not unreasonable when inflation is running at 12 per cent).

For those looking to raise capital, the alternative of funding through fresh equity is not cheap either, since stock valuations have suffered in the wake of the FII pull-out. In short, capital has suddenly become more expensive than a few months ago and, in many cases, it may not be available at all. The big risk is a possible repeat of what happened in 1996: Projects that are halfway to completion, or companies that are stuck with cash flow issues on businesses that are yet to reach break even, will run out of cash. If the big

casualty then was steel projects (recall Mesco, Usha and all the others), one of the casualties this time could be real estate, where building projects are half-done all over the country and some developers who touted their 'land banks' find now that these may not be bankable. The only way out of the mess is for builders to drop prices, which had reached unrealistic levels and assumed the characteristics of a property bubble, so as to bring buyers back into the market, but there is not enough evidence of that happening. The question meanwhile is: Who else is frozen in the sudden glare of the headlights? The answer could be consumers, many of whom are already quite leveraged. More expensive money means that floating rate loans begin to bite even more; even those not caught in such a pincer will decide that purchases of durables and cars are not desperately urgent. And it is not just the impact of those caught on the margin who must be considered. The drop in real estate and stock prices robs a much larger body of consumers of the wealth effect, which could affect spending on a broader front. In short, the second round effects of the financial crisis will be felt straightaway in the credit-driven activities and sectors, but will spread beyond that in a perhaps slow wave that could take a year or more to die down. One danger meanwhile is of a dip in the employment market. There is already anecdotal evidence of this in the IT and financial sectors, and reports of quiet downsizing in many other fields as companies cut costs. More than the downsizing itself, which may not involve large numbers, what this implies is a significant drop in new hiring -- and that will change the complexion of the job market. At the heart of the problem lie questions of liquidity and confidence. What the RBI needs to do, as events unfold, is to neutralise the outflow of FII money by unwinding the market stabilisation securities that it had used to sterilise the inflows when they happened. This will mean drawing down the dollar reserves, but that is the logical thing to do at such a time. If done sensibly, it would prevent a sudden tightening of liquidity, and also not allow the credit market to overshoot by taking interest rates up too high. Meanwhile, there is an upside to be considered as well. The falling rupee (against the dollar, more than against other currencies) will mean that exporters who felt squeezed by the earlier rise of the currency can breathe easy again, though buyers overseas may now become more scarce. Overheated markets in general (stocks, real estate, employment-among others) will all have an element of sanity restored. And for importers, the oil price fall (and the general fall in commodity prices) will neutralise the impact of the dollar's decline against the rupee.

What the World Bank Is Doing

Recovery from the global financial crisis remains fragile. Persistent risks to economic health include high unemployment, debt and low growth in developed countries, and access to financing for developing countries. In addition, food prices in 2011 were volatile and near their 2008 peak, and millions of people in the Horn of Africa are in urgent need of assistance as a result of devastating drought, conflict, and displacement. Read More

5 Lessons From the Great Recession for Latin America

December 2011 Based on data and labor market indicators, the World Bank draws key lessons from the impact of the Great Recession of 2008/2009 on the poor of Latin America and the Caribbean. Developing Countries to Receive Over $350 Billion in Remittances in 2011, Report Says

November 2011 While the economic slowdown is dampening employment prospects for some, global remittances, nevertheless, are expected to stay on a growth path. Food Prices, Financial Crisis and Droughts

November 2011 The food-price crisis that began in 2008 and the financial crisis of that year were intimately connected. Uneven Recovery from the Global Crisis in Developing Country Labor Markets

October 2011 Labor market recovery from the financial crisis remains sluggish in parts of the developing world. Zoellick: "We Must All Be Responsible Stakeholders"

September 2011 Bank President Robert Zoellick spoke on a world beyond aid at George Washington University.


Recovery from the global financial crisis remains fragile. Persistent risks to economic health include high unemployment, debt and low growth in developed countries, and access to financing for developing countries. In addition, food prices in 2011 are volatile and near their 2008 peak, and millions of people in the Horn of Africa are in urgent need of assistance as a result of devastating drought, conflict, and displacement. Since the onset of the financial crisis in 2008, the World Bank Group has committed $196.3 billion to developing countries, including record commitments in education, health, nutrition, population, and infrastructure, providing much-needed investments in crisis-hit economies:
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$106.3 billion - International Bank for Reconstruction and Development (IBRD), $47.1 billion - International Development Association (IDA), $37.1 billion International Finance Corporation(IFC), $5.7 billion -Multilateral Investment Guarantee Agency (MIGA).

The Bank Groups commitments for social protection for the poorest and most vulnerable including school feeding and cash transfer programs, such as Mexicos Oportunidades -- reached more than $9 billion in 72 countries during fiscal years 2009-2011 (FY09-11). That figure is seven time the pre-crisis level of $1.2 billion. To boost food security, the Bank has increased annual financing for agriculture to $6 to $8 billion a year, up from $4.1 billion in 2008. The Banks $2 billion Global Food Crisis Response Program, established in response to the 2008 food crisis, is now assisting 40 million people. The Bank also set up the Global Agriculture and Food Security Program (GAFSP), at the request of the G20. Six countries and the Gates Foundation have pledged $925 million to boost country-led food security and agriculture programs over the next three years. And though growth has recovered in many developing countries, demand for Bank Group assistance remains high. The World Bank Group committed $57 billion in fiscal year 2011, including $16.3 billion for the poorest countries, up from $14.5 billion in FY10. IBRD commitments, at $26.7 billion, are nearly double the FY08, pre-crisis level of $13.5 billion, and follows record commitments of $44.2 billion in FY10 and $32.9 billion in FY09, as the crisis peaked in developing countries.