1

IMT Nagpur
PGDM 2008-2010

Business Communication
Financial Meltdown

Course Coordinator:
Prof. H. V. Goud

Submitted by:
SEC D
Mayank Bhartia (08FN058)
Mayank Dwivedi (08FN059)




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Index
Page No.

1. Executive Summary 3
2. Introduction 4
3. Causes of the meltdown 5
4. Effect on various economies 7
4.1 North & South America 7
4.3 Europe 11
4.4 Asia 18
4.5 Australia 20
4.6 Africa 21
5. Bailout plans of various countries 22
5.1 China 22
5.2 U.S.A. 25
6. Special reference in INDIAN context 27
7. Conclusion 34
8. Bibliography 35
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Executive Summary

An expert writing the economic history of the United States a few decades from now will
inevitably have to consider the interplay of events engulfing the country in 2007 and 2008. It is a
period that could well be regarded as perhaps the most turbulent ever faced by the free markets;
an era marked by unprecedented monetary easing, extremely low interest regime, massive credit
expansion, and a mushrooming of housing assets creating a huge asset bubble leading to the final
collapse of several iconic financial institutions- Lehman Brothers, the 150-years-old investment
bank, Merrill Lynch, the iconic brokerage firm, AIG, one of the worlds largest insurers, Fannie
Mae & Freddie Mac, the Government- backed mortgagers and the list goes on.
To understand this financial earthquake requires a close look at the various sectors and their
respective roles in this American tragedy, but whose effects are global: the rating agencies, the
investment banks, the commercial banks, the different regulators, the government, and the
Federal Reserve/ Central banks. Globalisation has ensured that the Indian economy and financial
markets cannot stay insulated from the present financial crisis in the developed economies.

In this report, I have touched upon the various reasons causing this financial turmoil and have
tried to underline its effect on the world economy. I have tried to derive whether the Indian
phoenix can re-incarnate or not.











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GLOBAL FINANCIAL CRISIS

Global Financial Crisis: the root cause
The reason behind the global financial crisis is the sub prime crisis, epicentre of which is US.
What happened was that many corporations awarded to loans to debtors classified as sub prime.
These investments appeared to be very lucrative as the returns expected were higher as these
were lend at higher rates. But the flip side of these was the high credit risk involved. Due to their
lucrative offers, these investments were made at a very big scale. The creditworthiness of the
debtors was ignored. For a number of years prior to the crisis, declining lending standards, an
increase in loan incentives such as easy initial terms, and a long-term trend of rising housing
prices had encouraged borrowers to assume difficult mortgages in the belief they would be able
to quickly refinance at more favourable terms. However, once interest rates began to rise and
housing prices started to drop moderately in 20062007 in many parts of the U.S., refinancing
became more difficult. This led to drastic increase in the number of defaulters leading to the
major financial crisis of the century.
The sub-prime crisis started in 2007 and is still on. At the current juncture, the $2.2 trillion
subprime and alt-A market has seen a wipe out of around $550 bn worth of assets. Various
corporations having huge exposures in investments explained above have suffered huge losses.
Recently, US Investment Banking giant Lehman Brothers went bankrupt. Mortgage giants
Freddie Mac and Fannie Mae were nationalised to save them from huge losses which would have
hit the confidence of investors which was common man. Lehman Brothers was not saved
because the investors was not the common man but High Networth Individuals (HNIs). DSP
Merryl Linch was acquired by Bank of America. Insurance giant America International Group
(AIG) was saved to some extent by the $700 bn bailout package. Above incidents have led to
global meltdown. Stock Markets across the globe have got hit badly as stock prices plummeted
and investors have lost confidence in them. Central banks of various countries in Europe like
Germany, Belgium etc are giving bailout packages to save their economies.
When viewed in a global context, taking into account the instability generated by speculative
trade, the implications of this crisis are far-reaching. The crisis, however, has by no means
reached its climax. It could potentially disrupt the very foundations of the international monetary
system. The repercussions on people's lives in America and around the world are dramatic. The
crisis is not limited to the meltdown of financial markets, the real economy at the national and
international levels, its institutions, its productive structures are also in jeopardy. As stock
values collapse, lifelong household savings are eroded, not to mention pension funds. The
financial meltdown inevitably backlashes on consumer markets, the housing market, and more
broadly on the process of investment in the production of goods and services.
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The other causes of the meltdown are
High commodity prices


The decade of the 2000s saw a commodities boom, in which the prices of primary commodities
rose again after the late-twentieth century commodities recession of 1980-2000. But in 2008, the
prices of many commodities, notably oil and food, got so high to cause genuine economic
damage, threatening stagflation and a reversal of globalisation. In January 2008, oil prices
surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the
course of the year. By July the price of oil reached as high as $147 a barrel although prices fell
soon after.
The food and fuel crises were both discussed at the 34th G8 summit in July.
Sulfuric acid (an important chemical commodity used in processes such as steel processing,
copper production and bioethanol production) increased in price 3.5-fold in less than 1 year
whilst producers of sodium hydroxide have declared force majeur due to flooding, precipitating
similarly steep price increases. In the second half of 2008, the prices of most commodities fell
dramatically on expectations of diminished demand in a world recession.

Trade
In mid-October 2008, the Baltic Dry Index, a measure of shipping volume, fell by 50% in one
week, as the credit crunch made it difficult for exporters to obtain letters of credit.

6

Inflation
In February 2008, Reuters reported that global inflation was at historic levels, and that domestic
inflation was at 10-20 year highs for many nations. "Excess money supply around the globe,
monetary easing by the Fed to tame financial crisis, growth surge supported by easy monetary
policy in Asia, speculation in commodities, agricultural failure, rising cost of imports from China
and rising demand of food and commodities in the fast growing emerging markets," have been
named as possible reasons for the inflation.
In mid-2008, IMF data indicated that inflation was highest in the oil-exporting countries, largely
due to the unsterilized growth of foreign exchange reserves, the term unsterilized referring to a
lack of monetary policy operations that could offset such a foreign exchange intervention in
order to maintain a countrys monetary policy target. However, inflation was also growing in
countries classified by the IMF as "non-oil-exporting LDCs" (Least Developed Countries) and
"Developing Asia", on account of the rise in oil and food prices.
Inflation was also increasing in the developed countries, but remained low compared to the
developing world.

Unemployment
The International Labour Organization predicted that at least 20 million jobs will have been lost
by the end of 2009 due to the crisis - mostly in "construction, real estate, financial services, and
the auto sector" - bringing world unemployment above 200 million for the first time.

Return of volatility
For a time, major economies of the 21st century were believed to have begun a period of
decreased volatility, which was sometimes dubbed The Great Moderation, because many
economic variables appeared to have achieved relative stability. The return of commodity, stock
market, and currency value volatility are regarded as indications that the concepts behind the
Great Moderation were guided by false beliefs.


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The effect of financial meltdown on world economy country vise:-
North and South America
U.S.A

Number of U.S. household properties subject to foreclosure actions by quarter
The United States entered 2008 during a housing market correction, a subprime mortgage crisis
and a declining dollar value. In February, 63,000 jobs were lost, a 5-year record. In September,
159,000 jobs were lost, bringing the monthly average to 84,000 per month from January to
September of 2008.
Federal reserve rates changes ( Just the most recent year )
Date
Discount
rate
Discount rate Discount rate Fed funds Fed funds rate

Primary Secondary


rate change
new interest
rate
new interest
rate
rate
change
new interest
rate
Apr 30, 2008 -.25% 2.25% 2.75% -.25% 2.00%
Mar 18,
2008
-.75% 2.50% 3.00% -.75% 2.25%
Mar 16,
2008
-.25% 3.25% 3.75%

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Jan 30, 2008 -.50% 3.50% 4.00% -.50% 3.00%
Jan 22, 2008 -.75% 4.00% 4.50% -.75% 3.50%
Early suggestions of recession
In the early months of 2008, many observers believed that a U.S. recession had begun. As a
direct result of the collapse of Bear Stearns, Global Insight increased the probability of a worse-
than-expected recession to 40% (from 25% before the collapse). In addition, financial market
turbulence signaled that the crisis will not be mild and brief.
Alan Greenspan, ex-Chairman of the Federal Reserve, stated in March 2008 that the 2008
financial crisis in the United States is likely to be judged as the harshest since the end of World
War II. A chief economist at Standard & Poor's, said in March 2008 he has a worst-case-scenario
in which the country could endure a double-dip recession in which the economy would briefly
recover in the summer 2008
Under this scenario, the economy's total output, as measured by the gross domestic product,
would drop by 2.2 percentage points, making it the third worst recession in the post World War
II period The former head of the National Bureau of Economic Research said in March 2008 he
believed the country was then in a recession, and it could be a severe oneA number of private
economists generally predicted a mild recession ending in the summer of 2008 when the
economic stimulus checks going to 130 million households started being spent. A chief
economist at Moody's predicted in March 2008 that policymakers would act in a concerted and
aggressive way to stabilize the financial markets, and that then the economy would suffer but not
enter a prolonged and severe recession. It takes many months before the National Bureau of
Economic Research, the unofficial arbiter of when recessions begin and end, makes its own
ruling. According to numbers published by Bureau of Economic Analysis in May 2008, the GDP
growth of the previous two quarters was positive. As one common definition of a recession is
negative economic growth for at least two consecutive fiscal quarters, some analysts suggest this
indicates that the U.S. economy was not in a recession at the time. However this estimate has
been disputed by some analysts who argue that if inflation is taken into account, the GDP growth
was negative for the past two quarters, making it a technical recession. In a May 9, 2008, report,
the chief North American economist for investment bank Merrill Lynch wrote that despite the
GDP growth reported for the first quarter of 2008, "it is still reasonable to believe that the
recession started some time between September and January", on the grounds that the National
Bureau of Economic Research's four recession indicators all peaked during that period. New
York's budget director concluded the state of New York was officially in a recession. Governor
David Paterson called an emergency economic session of the state legislature for August 19 to
push a budget cut of $600 million on top of a hiring freeze and a 7 percent reduction in spending
at state agencies already implemented by the Governor. An August 1 report, issued by
economists with Wachovia, said Florida was officially in a recession. White House budget
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director Jim Nussle said the U.S. avoided a recession following revised GDP numbers from the
Commerce Department showing a 0.2 percent contraction in the fourth quarter of 2007 down
from a 0.6 percent increase and a downward revision to 0.9 percent from 1 percent in the first
quarter of 2008. The GDP for the second quarter was placed at 1.9 percent below an expected
2 percent. Martin Feldstein, who headed the National Bureau of Economic Research until June
and serves on the group's recession-dating panel, said he believed the U.S. was in a very long
recession and that there was nothing the Federal Reserve could do to change it. In a CNBC
interview at the end of July 2008 Alan Greenspan said he believed the U.S. was not yet in a
recession, but that it could enter one due to a global economic slowdown. A study released by
Moody's found two-thirds of the 381 largest metropolitan areas in the United States were in a
recession. The study also said 28 states were in recession with 16 at risk. The findings were
based on unemployment figures and industrial production data. In March 2008, Warren Buffett
stated in a CNBC interview that by a "common sense definition", the U.S. economy is already in
a recession. Warren Buffett has also stated that the definition of recession is flawed and that it
should be 3 quarters of GDP growth that is less than population growth. However, the U.S. only
experienced two consecutive quarters of GDP growth less than population growth.
Recession declared by economists
On December 1, 2008, the National Bureau of Economic Research (NBER) declared that the
United States entered a recession in December of 2007, citing employment and production
figures as well as the third quarter decline in GDP. The Dow Jones Industrial Average lost 679
points that same day.
Rise in unemployment
On September 5, 2008, the United States Department of Labor issued a report that its
unemployment rate rose to 6.1%, the highest in five years. The news report cited the Department
of Labor reports and interviewed Jared Bernstein, an economist:
The unemployment rate jumped to 6.1 percent in August, its highest level in five years, as the
erosion of the job market accelerated over the summer. Employers cut 84,000 jobs last month,
more than economists had expected, and the Labor Department said that more jobs were lost in
June and July than previously thought. So far, 605,000 jobs have disappeared since January. The
unemployment rate, which rose from 5.7 percent in July, is now at its highest level since
September 2003. Jared Bernstein, economist at the Economics Policy Institute in Washington,
said eight months of consecutive job losses had historically signaled that the economy was in a
recession. "If anyone is still scratching their head over that one, they can stop," Mr. Bernstein
said. Stocks fell after the release of the report, with the Dow Jones industrials down about 100
points after about 40 minutes of trading.
New York Times
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CNN also reported the news, quoted another economist, and placed the news in context:
"Job losses are still mild by recession standards, but the losses are relentless and they are
accumulating," said Bob Brusca of FAO Economics. "If job growth had paced with population
growth during this year, it would have meant 1.3 million new jobs would have been created.
Instead 605,000 were lost. That means about 2 million fewer people are working than if the
economy were on a steady path. And that's a big number." But while economists generally study
the payroll numbers most closely, it's the unemployment rate that registers with most Americans
when they think about the labor market. From late 2007 through September 2008, before the
official October 3rd bailout, there was a series of smaller bank rescues that occurred which
totaled almost 800 billion dollars.
In the summer of 2007 Countrywide Financial drew down 11 billion line of credit and then
secured an additional 12 billion bailout in September. This may be considered the start of the
crisis.
In mid-December 2007 Washington Mutual bank cut more than 3,000 jobs and closed its
subprime mortgage business.
In mid-March Bear Stearns was bailed out by a gift of $29 billion non-recourse treasury bill debt
assets.
In early July, depositors at the Los Angeles offices of IndyMac Bank frantically lined up in the
street to withdraw their money. On July 11, IndyMac, a spinoff of Countrywide, was seized by
federal regulators - and called for a 32 billion dollar bailout. The mortgage lender succumbed to
the pressures of tighter credit, tumbling home prices and rising foreclosures. That day the
financial markets plunged as investors tried to gauge whether the government would attempt to
save mortgage lenders Fannie Mae and Freddie Mac. The two were placed into conservatorship
on September 7, 2008.
During the weekend of September 1314, Lehman Brothers declared bankruptcy after failing to
find a buyer, Bank of America agreed to purchase Merrill Lynch, the insurance company AIG
sought a bridge loan from the Federal Reserve, and a consortium of 10 banks created an
emergency fund of at least $70 billion to deal with the effects of Lehman's closure,
[41]
similar to
the consortium put forth by J.P. Morgan during the stock market panic of 1907 and the crash of
1929Stocks on "Wall Street" tumbled on September 15. On September 16, news emerged that
the Federal Reserve may give AIG an $85 billion rescue package; on September 17, 2008, this
was confirmed. The terms of the rescue package were that the Federal Reserve would receive an
80% public stake in the firm. The biggest bank failure in history occurred on September 25 when
JP Morgan Chase agreed to purchase the banking assets of Washington Mutual. The year 2008 as
of September 17 has seen 81 public corporations file for bankruptcy in the United States, already
higher than the 78 in 2007. Lehman Brothers being the largest bankruptcy in U.S. history also
makes 2008 a record year in terms of assets with Lehman's $691 billion in assets all past annual
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totals. The year also saw the ninth biggest bankruptcy with the failure of IndyMac Bank. The
Wall Street Journal states that venture capital funding has slowed down which in the past led to
unemployment and slowed new job creation.
On September 17, Federal Reserve chairman Ben Bernanke advised Secretary of the Treasury
Hank Paulson that a large amount of public money would be needed to stabilize the financial
system. Short selling on 799 financial stocks was banned on September 19. Companies were also
forced to disclose large short positions. The Secretary of the Treasury also indicated that money
market funds will create an insurance pool to cover themselves against losses and that the
government will buy mortgage-backed securities from banks and investment houses. Initial
estimates of the cost of the Treasury bailout proposed by the Bush Administration's draft
legislation (as of September 19, 2008) were in the range of $700 billion to $1 trillion U.S.
dollars. President George W. Bush asked Congress on September 20, 2008 for the authority to
spend as much as $700 billion to purchase troubled mortgage assets and contain the financial
crisis. The crisis continued when the United States House of Representatives rejected the bill and
the Dow Jones took a 777 point plunge. A revised version of the bill was later passed by
Congress, but the stock market continued to fall nevertheless. As of mid-November, it was
estimated that the new loans, purchases, and liabilities of the Federal Reserve, the US Treasury,
and FDIC, brought on by the financial crisis, totalled over $5 trillion: $1 trillion in loans by the
Fed to broker-dealers through the emergency discount window, $1.8 trillion in loans by the Fed
through the Term Auction Facility, $700 billion to be raised by the Treasury for the Troubled
Assets Relief Program, $200 billion insurance for the GSEs by the Treasury, and $1.5 trillion
insurance for unsecured bank debt by FDIC. (Some portion of the Fed's emergency loans would
already have been repaid.)
Canada
In May 2008 Canada's GDP was reported to have decreased 0.1 percent due to decline in
mining, oil and gas industry by 1.2 percent and fall in automobile production by 3.6 percent.
Construction output in Canada declined 0.4 percent, utilities 1.3 percent, and farms produced 0.9
percent less. In the first quarter of 2008 Canada's economy shrank by 0.3 percent and the Bank of
Canada said second quarter growth would likely be less than 0.8 percent projected. Canada later
revised its first quarter GDP showing a contraction of 0.8% and gave second quarter GDP
showing an increase of only 0.3%.In early December 2008, the Bank of Canada, in announcing
that it was lowering its central bank interest rate to the lowest level since 1958, also declared that
Canada's economy was in recession.
Europe
Denmark showed a contraction of 0.6 percent in the first quarter of 2008 following a contraction
of 0.2 percent in the fourth quarter of 2007. Estonia similarly saw an economic contraction of 0.9
percent in the second quarter, following a 0.5 percent contraction in the first quarter. Latvia's
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gross domestic product fell 0.2 percent in the second quarter following a fall of 0.3 percent in the
first quarter. Sweden's economy showed zero growth in the second quarter of 2008.
[64]
The entire
economy of the European Union declined by 0.1 percent in the second quarter.
[65]
A European
Commission forecast predicted Germany, Spain and the UK would all enter a recession by the
end of the year while France and Italy would have flat growth in the third quarter following
second quarter contractions. Chairwoman of the Association of Estonian Food Industry, Sirje
Potisepp, warned the Estonian food industry would probably face bankruptcies citing two major
beverage companies in Estonia filing for bankruptcy. Ratings agency Fitch warned Ukraine
could be headed for a currency crisis as economic fundamentals deteriorate and the country
enters another period of political uncertainty. Fitch said the current account deficit was likely to
widen further as prices of gas imports rise and prices of its steel exports fall and said Ukraine
was likely to need to borrow more at a time when global debt markets have ground to a virtual
standstill. Ukraine's central bank chief, Petro Poroshenko, said he saw no need to intervene to
protect the currency. Only a few countries retained their high GDP predictions for the year 2008,
and can be mentioned Romania and Slovakia. Despite high economic growth for this year
(8.7%), Romania will be touched by the crisis, analysts forecasting only 4.7 growth for 2009.
Iceland
The Icelandic krna has declined 40% against the euro during 2008 and has experienced inflation
of 14%. Iceland's interest rates have been raised to 15.5% to deal with the high inflation and the
krna's decline is reportedly only beaten by that of the Zimbabwean dollar. This depreciation in
currency value has put pressure on banks in Iceland, which are largely dependent on foreign
debt. On September 29, 2008 Iceland's Glitnir was effectively nationalized after the Icelandic
government acquired 75% of the bank's stock. According to the government the bank "would
have ceased to exist" within a few weeks if there had not been intervention. Iceland's Prime
Minister Geir Haarde in a television address on October 6, 2008 said credit lines to Icelandic
banks had been cut off and that "the Icelandic economy, in the worst case, could be sucked with
the banks into the whirlpool and the result could be national bankruptcy" and that the
government was looking to other countries for sources of liquidity. Iceland's parliament
responded to the crisis by approving a bill giving the Government wideranging powers over the
banks, including the ability to seize their assets, force them to merge or compel them to sell off
their overseas subsidiaries. The parliament went on to seize control and nationalize Iceland's
second largest bank, Landsbanki, on October 8, 2008. The Parliament also extended a 400m
loan to the nation's largest bank, Kaupthing, in hopes that it would strengthen the institution's
balance sheet. On 8th October UK Prime Minister Gordon Brown announced that the UK
government would launch legal action against Iceland, whose government announced that they
had no intention of compensating any of the estimated 300,000 UK savers after the
nationalization of Landsbanki and its online brand, Icesave Chancellor of the Exchequer Alistair
Darling announced that the UK government would foot the entire bill, estimated at 4bn, and
that he was taking steps to freeze the assets of Landsbanki. The following day, Darling used the
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Anti-Terrorism, Crime and Security Act 2001 as the basis for seizing the assets of Landsbanki
Islands hf, an Iceland-based bank. Icelanders launced an on-line petition drive to protest this
action, which as seen as comparing Icelandic banks with Al-Qaida. Iceland's GDP is expected by
economists to shrink at least 10 percent as a result of the crisis, putting Iceland by some measure
in an economic depression.
United Kingdom
The economy of the United Kingdom has also been hit by rising oil prices and the credit crisis.
Sir Win Bischoff, chairman of Citigroup, said he believes that house prices in Britain will keep
falling for another two years. The Ernst & Young Item club predicted growth of only 1.5 percent
in 2008, slowing to 1 percent in 2009. They also predicted consumer spending would slow to
only 0.2 percent, and forecast a two-year drop in investment. The Institute of Directors quarterly
business opinion survey showed business optimism at its lowest level since the survey began in
1996.
[82]
Deputy Governor of the Bank of England, John Gieve said inflation would accelerate
"well over" 4 percent while economic growth is "slowing fast." Bank of England Governor
Mervyn King said there may be "an odd quarter or two of negative growth," following the first
quarter of 2009. Gieve said he couldn't rule out the U.K. economy heading into a recession,
adding the economy was "quite a long way" from the end of the slowdown. Nationwide, the
UK's biggest building society, warned the UK could head into a recession after house prices in
July fell 8.1 percent from the previous year. Housing prices declined by 1.7 percent in July,
double the decline recorded in June. Standard & Poor's said on July 30, 2008 that 70,000
homeowners were in negative equity and it could rise to 1.7 million or about one in six
homeowners in the UK based on an expected 17 percent decline into 2009. The Bank of England
reported that mortgage approvals fell by a record of nearly 70 percent. In Northern Ireland, house
sales saw a fall of some 50 per cent according to a survey by the University of Ulster/Bank of
Ireland and housing prices fell on average by 4 percent. British manufacturing activity declined
by the most in almost a decade in July, the third consecutive month of declines. The number of
companies that went into administration in MayJuly was 938, an increase of 60 percent
compared with the same period in 2007. The number of company liquidations in the second
quarter rose to 3,689, a 16 percent increase and the highest quarterly figure in five years. House
builders expect the number of houses built in 2008 in England and Wales to be the lowest since
1924. The declines are seen as an indication the United Kingdom has high chance of entering a
recession. Factory production in the UK dropped 0.5 percent in June when twelve out of 13
categories of factory production fell. The economic output of the UK was reported to have
increased by just 0.2 percent in the second quarter, the joint-slowest pace since 2001. The Office
for National Statistics later gave a revised number saying growth in the British economy was at
zero, the worst since the second quarter of 1992 The current slowdown has ended 16 years of
continuous economic growth, the longest period of economic expansion in Britain since the 19th
century. A report from the National Institute for Economic and Social Research said the
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economy contracted by 0.1 percent in the period from May to July and 0.2 percent from June to
August.
A voter backlash due to the personal financial effects of the global credit crunch was widely
attributed by politicians of the United Kingdom Labour Party, which had been in power since
1997, as the reason their political fortunes took a dramatic downturn through May 2008, with a
succession of defeats in by-elections and the London Mayoral election, and the worst opinion
poll result in their history
]
Political opponents countered this apparent excuse by pointing to the
fact that the incumbent Prime Minister Gordon Brown, who had taken office in June 2007 just
before the crisis broke, had been the country's 'Iron Chancellor', and had allegedly not ensured
the country had sufficient monetary reserves to be able to lower taxes and ease the burden on
voters, despite overseeing one of the longest sustained periods of economic growth in the
country's history. In August 2008 the party also faced calls to impose a windfall tax on the utility
companies, who were reaping record profits due to the fuel crisis, perceived as in bad taste given
rising food and fuel prices.
On 17 September 2008, news emerged that the banking and insurance group HBOS (Halifax
Bank of Scotland) was in merger talks with Lloyds TSB about creating a UK retail banking giant
worth 30bn. The move received the backing of the British government which stated that it will
over-rule any claims from the competition authorities.
According to the Office for National Statistics unemployment claims in August 2008 increased
by 32,500 to reach 904,900. The wider Labour Force Survey measure found joblessness rose by
81,000 to 1.72 million between May and July, the largest increase since 1999. In September,
British bank Bradford & Bingley's 20billion savings business was acquired by Spanish bank
Grupo Santander. While its retail deposit business along with its branch network will be sold to
Santander. The mortgage book, personal loan book, headquarters, treasury assets and its
wholesale liabilities will be taken into public ownership.
By November, unemployment had risen to over 1.8 million and is projected to surpass 2 million
by Christmas and perhaps even as high as 3 million by 2010.
From the 1st of December 2008 the UK Government made the decision to cut VAT from 17.5%
to 15% for 13 months in an attempt to encourage a big spend from UK shoppers before
Christmas.
On 4th December The [Bank Of England] cut interest rates from 3% to 2%, which amounts to
the lowest level since 1951.
Russia
The 2008 crisis in the Russian financial markets stemmed from the US sub-prime mortgage crisis
and has been compounded by the plummeting price of oil, which has lost more than two thirds of
15

its value since its record peak of USD 147 on 11 July 2008. While according to the World Bank
Russias strong short-term macroeconomic fundamentals make it better prepared than many
emerging economies to deal with thecrisis, its underlying structural weaknesses and high
dependence on the price of a single commodity make its impact more pronounced than
otherwise. Prudent fiscal management and substantial financial reserves have protected Russia
from deeper consequences of this external shock. The governments policy response so far
swift, comprehensive, and coordinated has helped limit the impact.
Sweden
Sweden has not been severely affected, and no banks or financial institutions have had real
trouble. However, some effects have been visible, mostly based on distrust and similar
psychological mechanisms. The stock market has declined heavily, because of influence from
New York and other markets. Some banks, especially Swedbank had invested heavily in US
housing bonds.
The banks do not trust each other well and the difference between the interbank interest rate and
the state interest rate has gone up at least 1%. The housing loan interest rates have gone up even
further. The global sale especially of cars has gone down, forcing the Swedish car industry to lay
off staff and contractors. The increased fear of enduring recession and the increased financing
costs are lowering company investments and private consumption.
Sweden entered recession after a two consecutive quarter of economic contraction. The Swedish
GDP contracted by 0,1% during both the second and third quarters of 2008.

Eurozone
In the eurozone as a whole, industrial production fell 1.9 percent in May, the sharpest one-month
decline for the region since the exchange rate crisis in 1992. European car sales fell 7.8 percent
in May compared with a year earlier. Retail sales fell by 0.6 percent in June from the May level
and by 3.1 percent from June in the previous year. Germany was the only country out of the four
biggest economies in the eurozone to register an increase of activity in July though the increase
was sharply down. Economic analysts from RBS and capital Economics say the decline raises
the risk of the eurozone entering a recession in 2008. In the second quarter, the eurozone's
economy was reported to have declined by 0.2 percent. The economy declined again in the third
quarter putting the eurozone in a technical recession.

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Ireland
Ireland in the first quarter of 2008 reported a contraction in GDP of 1.5 percent, its first
economic contraction since it began reporting by quarter and first recorded contraction since
1983. However, Ireland's Central Statistics Office reported growth in GNP of about 0.8 percent,
Ireland's government considers GNP a better measure of the economy. Analysts have predicted
Ireland's economy will contract further in the rest of the year. A report from NCB Stockbrokers
predicts gross national product will fall by 1 percent in 2008 and by 0.4 percent in 2009 due to a
decline in multinationals hit by the global economic slowdown. An economist from NCB said
non-residential investment would fall by 5 percent in 2008 and by 12 percent in 2009. Ireland's
GDP saw a contraction in the second quarter by 0.5 percent making Ireland the first member of
the eurozone to enter a recession.
Spain
Spain's Martinsa-Fadesa, a construction company, has declared bankruptcy as it failed to
refinance a debt of 5.1 billion. The two banks with most exposure to Martinsa-Fadesa are
reportedly Caja Madrid, at 900m, and Banco Popular, at 400m. Spain's finance minister Pedro
Solbes has said it would not bail out the company. In the second quarter in Spain house prices
reportedly fell 20 percent. In Castilla-La Mancha some 69 percent of all houses built over the
past three years are still unsold. Deutsche Bank said it expects a 35 percent fall in real house
prices by 2011. Spain's premier, Jose Luis Zapatero, blamed the European Central Bank for
making matters worse by raising interest rates. More than 98 percent of home loans in Spain are
priced off floating rates linked to Euribor, which has risen 145 basis points since August.
Housing accounts for over 10 percent of Spain's economy. The Bank of Spain is concerned about
the health of smaller regional lenders with heavy exposure to the mortgage market.
Although Spain has avoided recession in the first half of 2008, unemployment in the country has
risen by 425,000 over the past year, reaching 9.9 percent. Car sales in Spain fell 31 percent in
May. Spain's factory output slumped 5.5 percent in May. The country's business lobby Circulo
de Empresarios warned of a "high probability" that Spain's economy would fall into recession in
the second half of 2008 due to the housing collapse. Spain had a 7.9 percent decline in retail
sales in June compared to the previous year, the largest drop since Spain began registering the
results and the seventh consecutive monthly decline. This included a 17.9 percent drop in retail
sales of household goods. June food sales in Spain fell by 6.8 percent. Morgan Stanley issued a
major alert on the health of Spanish banks and the Spanish economy in a report, saying, "A
momentous economic slowdown is now under way. We believe the deterioration in Spain is just
in the beginning stages. The bulk of the pain will be suffered in 2009." Morgan Stanley also
warned there was 40 percent chance of a 0.5 percent contraction of the Spanish economy in
2009, with a risk of an even more extreme 1.4 percent contraction in 2009. According to Spanish
automobile manufacturers' association ANFAC new car sales fell 27.5 percent in July from the
same time in 2007, the third consecutive monthly drop of over 20 percent. Spain's government
17

forecast the unemployment rate would rise to 10.4 percent in 2008 and to 12.5 percent in 2009.
Spain's second largest bank predicted the unemployment rate could reach 14 percent in 2009.
Spain's Purchasing Managers Index for the manufacturing sector in July fell to a new low
suggesting a deep recession. In the second quarter Spain's economy grew by 0.1 percent, the
lowest gain in 15 years.


Germany, Italy, Greece, Portugal
In Germany officials are warning the economy could contract by as much as 1.5 percent in the
second quarter because of declining export orders. The economy of Germany contracted in both
the second and third quarters putting Germany now in a technical recession. Industrial output in
both Italy and Greece has slumped 6.6 percent over the past year. However, Greece's economy
will continue to grow for both 2008 and 2009; Eurostat expects the Greek economy to grow
3.1% and 2.5% respectively. Portugal is off 6.2 percent. Germany's industrial output was down
2.4 percent in May, the fastest rate for a decade. Orders have now fallen for six months in a row,
the worst run since the early 1990s
]
The German Chamber of Industry and Commerce warned of
up to 200,000 job losses in coming months. German retails sales fell 1.4 percent in June more
than any expectations. The German economy declined by 0.5 percent in the second quarter. In
Italy, Fiat announced plant closures and temporary layoffs at factories in Turin, Melfi, Imola and
Sicily. Car sales in Italy have fallen by almost 20 percent over each of the past two months.
Metalmeccanici, Italy's car workers' union said, "The situation is evidently more serious than had
been understood." On July 10, 2008 economic think tank ISAE lowered its growth forecast for
Italy to 0.4 percent from 0.5 percent and cut the 2009 outlook to 0.7 percent from 1.2 percent.
Analysts have predicted Italy had entered a recession in the second quarter or would enter one by
the end of the year with business confidence at its lowest levels since the 9-11 terrorist attacks.
Italy's economy contracted by 0.3 percent in the second quarter of 2008.
France, Finland, Benelux
Other eurozone members saw a decline in their economy in the second quarter. The French
economy declined by 0.3 percent, Finland's economy declined by 0.2%, and the Netherlands
showed zero growth in the second quarter. According to INSEE, France's statistical agency, the
French GDP was projected to decline by 0.1 percent in the third quarter of 2008 with another 0.1
percent decline in the fourth quarter and Eric Woerth, the French budget minister, said France
was in a technical recession. However the final estimations gave by the INSEE showed the
French GDP actually increased by 0,14% thus avoiding a technical recession. In order to fight
the economic crisis a 26 billion strong rescue plan was announced by President Sarkozy. This
saving plan however includes the scheduled budget for 2009, this makes 15,5 billion in addition
to the normal budget for 2009. The French public deficit in 2009 is expected to raise to 4% with
18

of this plan. It is similar in its conception to Obama's rescue plan in that it will be used, to a large
extent, for public investments on infrastructures.More precisely railways, waterways, motorways
will be improved; Hospitals, tribunals, the Gendarmerie and the Police will be modernised. In
addition to these infrastructure the national defence will also benefit from this plan as well as
public landmarks. Small business companies will get a tax rebate in 2009. Another part of the
deficit will be used to pay for the national debt to French companies. Regulations over the public
market, especialy construction and civil engineering, will be softened. Laws on urbanism will
also be softened to favour construction and significantly lower delays between the moment a
project is discussed and then built.
On September 28, Dutch-Belgian bank Fortis was partially nationalized with a cash infusion
from the Benelux countries amounting to 11.2 billion. Fortis' troubles started in the beginning
of the year with an announcement that it faced around $1.5 bn of losses in the American sub-
prime catastrophe. In June, the company announced a selloff of assets to raise 5 bn to improve
the liquidity of the organisation. This, however, proved insufficient. On 6 October 2008, the
French bank BNP Paribas took over 75% of Fortis' activities in Belgium, and 66% in
Luxembourg, in exchange for the Belgian government becoming the new group's major
shareholder.

Asia
China
In China, the IMF predicts GDP growth for 2008 will be 9.7% and drop to 8.5% in 2009. A
struggle was underway to see who would swallow the losses on US Agencies and Treasuries. On
November 9, 2008 China announced a package of capital spending plus income and consumption
support measures. Four trillion yuan ($586 billion) will be spent on upgrading infrastructure,
particularly roads, railways, airports and the power grid; on raising rural incomes via land
reform; and on social welfare projects such as affordable housing and environmental protection.

Japan
In Japan exports in June declined for the first time in about five years falling by 1.7 percent.
Exports to the United States and European Union fell 15.4 percent and 11.2 percent respectively.
The decline in exports and increase in imports cut Japan's trade surplus $1.28 billion a decline of
90 percent from the previous year. An economist at the Royal Bank of Scotland said the decline
means the Japanese economy most likely declined in the second quarter. Taro Aso, secretary-
general of Japan's ruling Liberal Democratic Party, said he believes Japan had entered a
recession. Japan's economy declined by 0.6 percent in the second quarter of 2008. This was later
19

revised to a decline of 0.7 percent. Japanese exports grew 0.3 percent in August of 2008
compared to a year before down from 8 percent the previous month. Exports to the U.S. fell 21.8
percent, the biggest decline on record, and exports to Europe fell 3.5 percent. Two Japanese
banks appeared on the list of major Lehman creditors. On November 17th, the Japanese
Economy Minister announced that the nation was officially in a recession.
India
India's economy is expected to grow about 6.8% during FY2008 and as low as 5.5% in FY2009.
India's economy grew at an annual rate of 9% or more in the past three years, second only to
China among the major economies, and the projections for FY2008 indicate that India's
economic growth has been effected by the economic crisis. The former Indian Finance Minister
P. Chidambaram, however, said that he expected India's economy to "bounce back" to 9% during
FY2009. This prediction has been met with skepticism by observers. The Asian Development
Bank predicted India to recover from weakening momentum in 4-6 quarters. At the G20 Summit,
India called for coordinated global fiscal stimulus to mitigate the severity of the global credit
crunch. India said that it would inject US$4.5 billion into the financial system to help exporters.
Some analysts pointed that India's going trade with other Asian countries, especially China, will
help reduce the negative impact of the crisis. Analysts also said that India's high domestic
demand and large infrastructure projects will act as a buffer reducing the impact of the global
downturn on its economy. Economists argued that India's financial system is relatively insulated
and its banks do not have significant exposure to subprime mortgage.
Singapore
Singapore's economy saw its biggest drop in five years in the second quarter, falling by 6.6
percent; however, the Managing Director of Singapore's central bank said a technical recession
was not likely. Singapore cut its 2008 GDP forecast to between 4 and 5 from 4 to 6 percent
before, and then again down to 3 percent. Singapore's economy contracted in the third quarter,
placing the country in recession.
South Korea
By September 2008, the crisis threatening the GSEs (US mortgage lenders Fannie Mae and
Freddie Mac) began to have consequences in Asia. The foreign exchange reserves of South
Korea's central bank contained many depreciating "Agency bonds" from the GSEs, threatening a
currency crisis and leading to depreciation of the South Korean won against the US dollar and
other major currencies,. Samsung Electronics has been reported to be posting a decrease in sales
for the first time since the Asian financial crisis since home appliances saw a decrease in the
domestic market of up to 20 percent since mid-June compared to the previous year. Domestic
auto sales also saw a decrease in the second quarter. Auto exports also posted a loss and exports
of home appliances were also reported to be in decline.
20

Sri Lanka too is affected with the global recession as the demand for their major products such as
garments, tea, rubber, coconut based products and agricultural products are at a downturn. At the
moment, tea is severely affected and it is analyzed that the country is experiencing 35% drop in
the exports presently.
Taiwan
Taiwan announced billions of dollars in spending and tax cuts due to declining growth and a 26
percent slump in the stock market in 2008. The bankruptcy of Lehman Brothers raised concerns
about global exposure to the assets and stock of Lehman Brothers and the potential for the
bankruptcy to cause further tightening of credit. Taiwan, despite reporting few losses from the
subprime mortgage crisis, was said to have Lehman-related exposure for its companies and retail
investors totaling $2.5 billion.

Ecuador is seeking ways to default on sovereign debts incurred under the government of
Gustavo Noboa, which the present government deems to have been incurred illegally.
]
If
Ecuador defaults, it will be the first developing country to default on sovereign debt since the
crisis began.
New Zealand
New Zealand Institute of Economic Research's quarterly survey showing New Zealand's
economy contracted 0.3 percent in the first quarter and Treasury figures suggested the economy
also contracted in the June quarter putting New Zealand in a technical recession.
[146]
The
Treasury says the economy could recover in the second half of the year under the impact of high
dairy prices boosting farmer incomes and cuts to personal tax rates, which come into effect on
Oct. 1. About 23 financial companies in New Zealand have filed for bankruptcy in a year.
Housing starts in New Zealand fell 20 percent in June, the lowest levels since 1986. Excluding
apartments, approvals dropped 13 percent from May. Approvals in the year ended June fell 12
percent from a year earlier. Second-quarter approvals dropped 19 percent. The figures suggest a
decrease in construction and economic growth. House sales fell 42 percent in June from a year
earlier. The New Zealand Treasury concluded that the country's economy had contracted for a
second quarter based on economic indicators, putting New Zealand in a recession. New
Zealand's central bank cut rates by half a percent arguing the economy was in recession. New
Zealand's GDP declined by 0.2 percent in the second quarter putting the country in its first
recession in a decade.
Australia
In Australia, Hans Redeker, currency chief at BNP Paribas has said Australia would have to
generate 4 percent of its GDP to meet payments to foreign holders of its assets. National
21

Australia Bank on July 29, 2008 cut a A$850 million bond sale by two thirds following investor
flight and opted for a 100 percent write-off on a clutch of "senior strips" of AAA-rated
collateralized debt obligations (CDO) worth A$900 million. Approvals for loans to build or buy
homes and apartments decreased 3.7 percent in June of 2008. Housing prices in Australia fell in
the second quarter of 2008 for the first time in about three years. Consumer confidence in
Australia fell to a 16-year low in July and retail sales fell 1 percent in June.
[154]
High profile
casualties of the credit crunch include Allco Finance, MFS, ABC Learning, Babcock & Brown
and Centro while numerous other institutions have lost a significant part of their value. Despite
all this, sources such as the IMF and the Reserve Bank of Australia predict Australia is well
positioned to weather the crisis with minimal disruption, sustaining more than 2% GDP growth
in 2009 (while many Western nations go into recession). The World Economic Forum recently
ranked Australia's banking system the fourth best in the world, while the Australian dollar's 30%
drop is seen as a boon for trade, shielding from the crisis, and for helping to slow growth and
consumption.
South Africa
Moody's Investors Service warned on July 7, 2008 that South Africa could slip into a recession
by the turn of the year. Moody's cited electricity shortages, high interest rates, soaring inflation, a
slumping housing and vehicle market and lower business and consumer confidence indicators.
Growth in South Africa's gross domestic product for the first quarter of 2008 slowed to 2.1%.
CPIX inflation, the monetary-policy inflation target measure, rose 10.9% on a year-on-year basis
in May, its highest level since November 2002. South Africa's National Treasury criticized the
statement by Moody's saying, "It's not possible that we'll end up in recession." He added that the
government may revise lower its 4 percent growth forecast for the year following growth of
5.1% in 2007. Car sales in South Africa dropped an annual 22 percent in June due to higher
interest rates.




22

Reforms adopted by various economies

Chinese
Equity and commodity prices surged across the world after China announced a $586-
billion stimulus package that may spur economic growth in that country, the worlds third
largest economy, and help avert a global recession. Indian stocks rose the most in more than a
week, led by metals and mining stocks, and the Bombay Stock Exchange (BSE) benchmark
Sensitive Index (Sensex) advanced 571.87, or 5.7 per cent, to close at 10,536.16. This was in
tune with the rest of the world markets.
Stocks also rose all over Europe and the US index futures went up sharply. Emerging-market
stocks jumped the most this month with the MSCI Emerging Markets Index rising 3.5 per cent.
Chinas CSI 300 stock index surged the most in seven weeks, gaining 7.4 per cent.
China plans fast and heavy-handed investment in housing and infrastructure to lift
growth from a five-year low, the State Council said yesterday. China is Indias third-largest
trading partner after the European Union and the US, with bilateral trade of about $37 billion.
The speculation that the package will boost demand from the second-largest oil consumer also
pushed crude oil and copper prices as much as 5 per cent higher. Rubber, edible oil, precious
metals and other base metals all rebounded from the downtrend in the past few months.
Analysts said commodity prices have risen after a fortnight. Earlier, increases were due to
profit-taking by bear operators, but this time real buying is taking place. Apart from the Chinese
package, the other favorable factor is the easier liquidity situation. There is also wide expectation
that more such measures may be announced before the G-20 meeting this weekend.
The rupee also rose to the highest level in more than a month on speculation that Chinas
spending plan would boost investor confidence in Asian economies. The rupee advanced 0.6
per cent to 47.38 a dollar at close on Monday.

MARKETS CHEER THE CHINA SYNDROME
Name
Quote
units
7-Nov 10-Nov
%
Change
LME Aluminum 3
months
$/MT 1960 2033 3.72
23

LME Copper 3
months
$/MT 3815 4105 7.6
LME Nickel 3
months
$/MT 11560 12120 4.84
LME Zinc 3 months $/MT 1110 1160 4.5
Gold spot $/t oz. 736.65 751.71 2.04
Silver spot $/t oz. 10.07 10.31 2.38
Crude palm oil Fu* **MYR/MT 1609 1626 1.06
Corn Fu# $/bu. 375.5 387.5 3.2
Brent Crude $/barrel 57 59.92 5.12
Rubber Yen/kg 181.2 187.9 3.7
Soyabean $/bu. 9.19 9.5 3.37
Wheat $/bu. 5.19 5.32 2.5
* Futures Jan 09 # Futures Dec 08 ** Malaysian Ringgit
Source: Bloomberg, LME
. If demand goes up in countries like China, it will stimulate world economies as well.
The stock markets seem to agree. Tata Steel rose 13 per cent, its sharpest gain in more than
nine years, and Sterlite Industries gained 14 per cent, its biggest gain this month. Oil and Natural
gas Corporation gained 8.8 per cent.

ASIA % Chg*
Shanghai
Composite
7.27
Nikkei 225 5.81
24

Sensex 5.74
Hang Seng 3.52
Kospi 1.58
EUROPE
CAC 40 1.06
DAX 1.76
FTSE 100 0.89
US #
Dow Jones -0.74
Nasdaq 100 -1.30
* over previous close
# at midnight (IST)
Domestic institutions were big buyers today and bought shares worth Rs 377 crore, and foreign
institutional investors (FIIs) were net buyers though the amount was a minuscule Rs 92 crore.
The China package and interest rate cuts across the globe changed the short-term outlook
leading to short covering. Metals, infrastructure and power companies were the major gainers
today on the BSE.
In the London commodity markets, copper for delivery in three months gained $340, or 9.1 per
cent, to $4,095, reversing last weeks decline. Bullion for immediate delivery also advanced
sharply.
Analysts said the Chinese package is different from those announced by various other central
banks including the US Fed.
While the others were bailouts, China will spend to boost infrastructure and consumption that
will lead to increase in demand everywhere.
Pradeep Shah, head of IndAsia Fund Advisers, said India is also acting in unified way to address
the current crisis, but there is a suggestion that China-type measures could step up demand. The
government should reduce excise duties across board so that demand can go up, he said.
25

US Fed announces $800bn stimulus

Henry Paulson announces the stimulus package
The Federal Reserve is to inject another $800bn (526.8bn) into the US economy in a
further effort to stabilise the financial system.
US Treasury Secretary Henry Paulson said the stimulus package aimed to make more lending
available to consumers.
About $600bn will be used to buy up mortgage-backed securities while $200bn is being targeted
at unfreezing the consumer credit market.
Financial institutions are reluctant to lend, deepening the
economic slowdown.
The situation has been exacerbated as the credit crisis has
worsened.
Meanwhile US President-elect Barack Obama said budget reform was "imperative" with the
economy in crisis.
"It is not an option. It's a necessity," he said.
'Troubling'
Key lending such as credit cards, car loans and student loans had essentially come to a halt in
October, Mr Paulson said. He added that the new measures were aimed at getting these types of
lending back to more normal levels.
"It will take time to work through the difficulties in our market and our economy and new
challenges will continue to arise," he said.
"We are committed to using all the tools at our disposal to preserve the strength of our financial
institutions and stabilise our financial markets to minimise the spill-over into the rest of the
economy."
The announcement came as Commerce Department figures showed US economic output shrank
between July and September at a faster pace than initially predicted, which the White House
described as "troubling".
GDP fell at an annual rate of 0.5% in the third-quarter - from the 0.3% estimated a month ago -
as consumers cut spending by the largest amount in 28 years.



26

"This is why we are having to take such bold actions," a
White House spokeswoman said.
Meanwhile, the Standard & Poor's/Case-Shiller national
home price index slumped by a record 16.6% during the
quarter from the same period a year ago - taking prices
down to levels not seen since early 2004.
Bail-out details
Under the latest rescue plan - which is in addition to the already-announced $700bn bank bail-
out - the Fed is to buy up to $100bn in debt from the troubled mortgage giants Fannie Mae and
Freddie Mac.
The central bank said it would also buy another $500bn in mortgage-backed securities - pools of
mortgages that are bundled together and sold to investors.
The Fed said that the $600bn effort to support the mortgage market was being taken to reduce
the cost of home mortgages and increase their availability.
It said the purchases of the mortgages and mortgage-backed securities would take place over a
number of months.
In addition to the $600bn effort on mortgages, the Fed also unveiled a separate programme to
help unfreeze the consumer debt market.
The central bank said it would lend up to $200bn to the holders of securities backed by various
types of consumer loans, such as credit cards and student loans.












27

SPECIAL REFERENCE IN INDIAN CONTEXT

I mpact on I ndia
Indian economy was also hit by Global Financial crisis but to a limited extent. Indices of Stock
Markets (Nifty, Sensex etc) plummeted but not because of loss of confidence of domestic
investors significantly. The major reason for downward trend in these indices is the excessive
outflow by FIIs as they are facing liquidity crunch in other countries as well as they are hit by
panic. Indian Stock Exchanges saw year to date (YTD) FII outflow of $9.2 bn. With US bailout
package in place, pressure on liquidity will ease and stability to the Indian market.
Indian economy being a domestic consumption driven economy with exports constituting a very
small portion of GDP is insulated from global crisis to great extent. GDP is expected to grow at
7-8%.
Barring domestic brokerages, this meltdown has not affected any domestic BFSI (Banking,
Financial Services & Insurance) business significantly. Public sector banks are safe. Apart from
reasonable exposure that some Indian private sector banks have, rest of the business is as usual.
Indian regulators (RBI & SEBI) have done a good job by putting caps and regulations on foreign
investments. RBI, for instance, had used ECB, Repo Rates, CRR & LAF (Liquidity Adjustment
Facility) to good effect.
Moreover, Indian economy is undergoing real economic growth (infrastructure, services etc)
unlike the developed countries experiencing financial growth (excessive lending etc.). Hence,
Indian economys growth is not so much impacted by the financial turmoil when compared with
countries like US and UK which are epicentres for this crisis.
The effect of the financial crisis on India and the re-incarnation of the Indian phoenix can be
summarized under the following heads-
1. Effect on Dalal Street
Rumours flew thick and fast on 15 September, the day Lehman Brothers filed for bankruptcy
protection. Reliance Industries shares which have the largest weight in the benchmark indices
(15 percent in the Sensex and 11 percent in Nifty), lost more than 12.4 percent in 12 sessions
beginning 1 September. Property stocks like DLF, Unitech & HDIL are the hardest hit as traders
targeted stocks where these financial institutions had largest exposure. Equity market will
continue to remain in bearish mood with reduced off-shore flows, limited domestic appetite due
to liquidity pressure and pressure on corporate earnings
The figure below shows the performance of SENSEX since Jan 2008. SENSEX has collapsed
drastically from above 20,000 level in Jan 2008 to nearly 11,000 mark in Oct 2008.
28


Month Open High Low Close
Price/Earning
s
Price/Boo
k value
Dividen
d Yield
January
2008
20,325.27

21,206.77

15,332.42

17,648.71
25.53 6.35 0.88
February
2008
17,820.67

18,895.34

16,457.74

17,578.72
22.23 5.71 0.97
March
2008
17,227.56

17,227.56

14,677.24

15,644.44
20.18 5.19 1.07
April
2008
15,771.72

17,480.74

15,297.96

17,287.31
20.71 5.22 1.03
May
2008
17,560.15

17,735.70

16,196.02

16,415.57
20.66 4.82 1.01
June
2008
16,591.46

16,632.72

13,405.54

13,461.60
18.22 4.09 1.14
July 2008
13,480.02

15,130.09

12,514.02

14,355.75
17.06 3.59 1.36
August
2008
14,064.26

15,579.78

14,002.43

14,564.53
18.25 3.81 1.26
Septembe
r 2008
14,412.99

15,107.01

12,153.55

12,860.43
17.36 3.62 1.33
October
2008
13,006.72

13,203.86

10,740.76

11,328.36
15.25 3.18 1.51
Source: BSE website
The graph below shows the movement of SENSEX since Jan 2008. We can see that the
downward trend has affected the market capitalization of the countries and have eroded the
shareholders wealth.
Fig: Movement of SENSEX since Jan 2008
29


Source: moneycontrol.com
2. Effect on employment level
The biggest danger is that of the 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 are cutting their 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.
Software industry, which is one of Indias largest employment provider and export-earner, will
be severely affected. The industry earns more than 60% of its revenues from the US and the
recent spate of closures and mergers will mean the trimming of various software-related services.
Indian companies may not lose out much on revenue from software maintenance business in the
US but the earnings from services such as new application development and implementation of
packages (SAP, Oracle etc) is sure to be affected by the slowdown. Indian software companies
will be more hit than their peers in other countries because they are more dependent on banking,
financial services and insurance (BFSI) firms in the US, the segment worst affected by the
turmoil.
It could be mixed bag for the BPO sector. While some BPOs, which were heavily dependent on
the BFSI sector, could see their fortunes dwindling, some high-end BPOs with substantial cost
advantage could see more business coming their way.

30

3. Effect on insurance sector
In the insurance sector, IRDA regulations are strict & require money to be kept in India.
Insurance policy-holders are safe but the perception that even an institution like AIG could
buckle under will dent the credibility of private insurers. The problems could arise only when
fresh capital is to be infused.
After the AIG filed for bankruptcy, there were rumours that Tata-AIG venture is also in
shambles. But Tatas are a sound partner in this venture and even in the worst case scenario are
capable of carrying the business of their own. They have gone on the record to state that they
would exercise the first right of refusal and buy the shares in case AIG was forced to divest its 24
percent stake in the joint venture.

4. Impact on other sectors
The good news is that for the FMCG industry, the impending credit crisis is unlikely to have a
major impact. Most of the companies such as HUL & ITC are cash rich and they can weather the
turmoil more comfortably than the minnows.
Pharmaceutical firms too are expected to remain afloat during the troubled times because Indian
companies are low-cost manufacturers of high-quality drugs. This is likely to be an advantage in
a time of crisis.
For other industries like telecom, media & entertainment, the impact is likely to be limited.
Hotels, particularly in the big cities that cater to travelers are largely dependent upon foreign
tourists from UK & US. Hence, the impact could be higher on hotel industry because the pace of
blow-ups in these countries has recently peaked.

5. FIIs pulling out
The FIIs, who have been in exit mode since January, have liquidated shares worth Rs 8,739,
only in the first fortnight of September. The net sales, since the beginning of 2008 are estimated
at over Rs 37,000 crores. This means that corporates access to overseas funds will be limited
and more expensive going forward. Lenders will now look more closely at who is the counter-
party and make a careful assessment before taking on additional risks. This could mean a
tightening of liquidity with further rise in interest rates. And industry, which is already in a tight
spot, will be squeezed further. The concerted intervention by central banks of developed
countries in injecting liquidity is expected to reduce the unwinding of India investments held by
foreign entities, but fresh investment flows into India are in doubt.

31

6. Effect on Indian Banks
In the financial sector, ICICI bank lost heavy ground. ICICI Bank, with nearly 7 percent weight
in the Sensex, was targeted on the reckoning that it housed contaminated assets and would have
to undertake huge losses on account of mark-to-market provisions. Rumours about further losses
and several senior managers selling their shares added to the chaos. But the good thing is that
PSU banks, considered as relatively safe heaven by investors, did not lose as much ground as the
private sector banks.
The banking sector will have the least impact as high interest rates, increased demand for rupee
loans and reduced statutory reserves will lead to improved NIM while, on the other hand, other
income from cross-border business flows and distribution of investment products will take a hit.
Banks with capabilities to generate low cost CASA and zero cost float funds will gain the most
as revenues from financial intermediation will drive the banks profitability.

Macro-economical aspects
Impact of this financial turmoil on the macro-economic factors are summarized in the following
points-
1. Borrowing costs up
RBI had announced measures to salvage the falling Rupee, which had crossed Rs48 to the
Dollar. It said it would continue to sell Dollars through agent banks or intervene directly to meet
any supply-demand gaps.
While the RBI steps did have a salutary affect on the sliding Rupees vis--vis the dollar, it will
be a while before credit starts flowing as before. Promoters of companies would be hit by
depreciation in value of their equity holdings, which are normally leveraged to provide additional
capital sought by way of preferential issues or for shoring up their holdings in the company.
Promoters who have already borrowed against their holdings would have to meet the additional
margin call requirements following the erosion in the value of their assets and also pay higher
risk premium in volatile time for additional borrowings.
While big companies will be hit, it is the small and medium companies that will find it extremely
difficult to raise funds. During troubled times, quality lenders are loathe to take exposure from
small borrowers having inadequate collateral. The worst hit will be SMEs. While issues form the
big houses or PSUs divestments may still evoke a good response irrespective of conditions, the
market for mid-size companies is virtually dead.


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2. Adverse effect on M&As
What would hurt companies even more will be their inability to grow through M&As despite the
fact that overseas assets are available at bargain rates. This inability to fund acquisitions from
overseas borrowings will slow down the overseas growth plans of Indian companies. Even
private investors who were otherwise gung-ho on funding these acquisitions will now turn wary.
Only respite is that times like this offer opportunities for private equity investors to acquire
assets which could be capable of providing super-normal profits.

Source: RBI website

3. Depreciation of Rupee
The Indian rupee has several negative factors - a current account deficit, high inflation and high
fiscal deficit, all of which tend to weaken the currency. The one positive factor is a still high
growth rate of 7-8% that attracts foreign funds and hence capital inflows. But these are fickle
since they depend on factors not in our control. Major factors for rupee fall are external
commercial borrowings (ECB) repayments and FII outflows from the equity market. Also, the
dollar has been strong against major currencies like the Euro, British Pound & Swiss Franc. As
oil futures started falling rapidly from May onwards, speculators turned to other asset classes
such as the Dollar and gold which resulted in the unwinding of oil futures into dollars.
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.
Possible solutions for reincarnation of I ndian phoenix
Given the dependence on foreign funds and off-shore consumer demand for the India growth
story, India cannot wish away from the negative impact of the present global financial crisis but
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should quickly focus on alternative remedial measures to limit damage and look in-wards to
sustain growth.
For this, RBI must control the growing inflation which is hovering around the 12% mark, by
creating capacities rather than by restricting demand. RBI should cut CRR with retrospective
effect and provide liquidity back to the system. Liquidity should be directed towards the creation
of assets rather than towards speculating and hoarding. Risk weights, mandatory allocation and
specific restrictions should be used to ensure that the banking sector liquidity flows to the right
priorities. Indian entrepreneurs should be supported by the the domestic liquidity and should be
allowed to manage the environment to make their projects up and running in the shortest possible
time.
Another measures can be to further relax norms on the capital account, both NRI and ECB
guidelines, a likely cut in the SLR given the continued buoyancy in both credit and deposits and
consequent demand for government securities to meet statutory requirements, and a possibility of
keeping rates on hold given lower commodity prices and stabilizing inflationary expectations.


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CONCLUSION
After seeing the facts of the current financial meltdown, its effects and the bailout plans being
adopted by the various economies can be clearly stated that the financial crisis at this point of the
time in the world is the worst crisis of this century.
The only way out to this financial crisis is that a firm step should be taken by various
governments across the globe because as the markets are coupled a single country cannot by
itself face the crisis. The combined effort of the central bank of all countries and the IMF can
obviously lead the world out of this great depression.

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BIBLIOGRAPHY

1. http://economictimes.indiatimes.com/ET_Debates/Will_financial_crisis_derail_Indias_ec
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2. http://economictimes.indiatimes.com/articleshow/3574867.cms
3. http://in.answers.yahoo.com/question/index?qid=20080928234417AATS9Pk
4. http://www.livemint.com/2008/10/05234405/Global-financial-crisis-India.html
5. http://www.thehindubusinessline.com/
6. www.economictimes.com
7. www.nasscom.org
8. www.wikipedia.com
9. www.china-briefing.com
10. http://groups.google.co.in/group/aiii
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12. www.sify.com
13. http://groups.google.co.in/group/india-investor