2553 words essay on world

financial crisis
In modern world, financial crisis at world
level can be traced back to 1920s, when
economic depression of 1929 occurred. It
is said that history repeats itself. Todays
world financial crisis which started with
mortae crisis is only one aspect of
history.
!risis bean with sub"prime lendin crisis
and whole financial system was enulfed.
#ub"prime crisis refers to the crisis faced
by the mortae companies that were in
loanin business that due to adverse
situations ran in trouble. $s a result the
number of defaulters increased resultin in
hue bad debts for the mortaee
companies.
#everal of worlds best manaed financial
institutions went bankrupt and rests are
dyin for bail out. The world demand
cycle is headin south and its impact is
visible in world petroleum prices and auto
manufacturers recent outcry for bailout.
The li%uidity is enulfin the whole world
and takin the shape of financial famine.
In the period of stron lobal rowth
rowin capital flow and proloned
stability market participant souht hiher
output without an ade%uate calculation of
the risks and failed to e&ercise proper due
dilience. 'eak underwritin standards,
unsound risk manaement practices
increasinly comple& and opa%ue financial
products and conse%uent e&cessive
leverae combined to create vulnerabilities
in the system.
$t the same time what looked as brisk"
effervescence is financial market ended up
in becomin alarm riner for a reater
catastrophe in the comin years. This was
started with a small upheaval created by
the sub prime crisis in 200( in the worlds
larest and most sinificant financial
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markets Y.#. later in 200Z the whole of
brink of fallin apart. $part from
e&pansion the deepenin of financial
markets occurred for most of the courtiers
in recent times.
The rowths in financial capital asses for
the countries have been much faster than
the respective countries [\] rowth.
#outh financial times sector where the
financial depths have increased to more
than ^00"900 times the [\] of these
countries.
_owever, the financial capital assets have
sured manifolds for the countries such as
new emerin economics of $sia `ussia,
aastern auropean countries and some of
the biddle aast countries thouht are late
entrant. bany factors have contributed to
the countries success in reachin such a
phenomenal increase.
cne of the mador reasons for the e&pansion
in financial markets is the efficiency
brouht about the natured capital market
rowth. This rendered facilitated corporate
borrowin. It increased the corporate
borrowin throuh issuance of shares
public traded bonds the securities by these
companies in the capital market.
$part from increased issuance of public
traded bonds, shares and e%uities the
increasin valuations of the companies and
forein investments have helped the
countries in escalatin the role and
importance of capital market. `isin
e%uities values from stroner corporate
earnin, issuance of asset backed securities
risin asset price and overnment debts
have helped in increasin eh countries
financial depth.
$part from the above mentioned factors,
lobalieation also helped in enhancin the
role played by forein investment in the
spreadin the financial sector rowth to
other peripheral nations that were outside
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the core hub of new financial
capitalieation. 'hereas role of forein
institutional investment XkIIsf that invests
thorouh capital market for short term
ains directly impact the capital market
deepenin.
The forein direct investments Xk\Isf
directly invest in countries for lon term
financial prospects. These have increased
the financial market deepenin as well.
The k\I investment in developin
countries brin in with the reater
financial habits. Y# and auropean markets
are known to be financial capital market
hub and have reater e&posure to the
secondary and derivative market
operations. lesides increasin the
financial rowth its operation in k\Is help
in increasin the valuation of the
companies in the emerin market like
!hina, India and other $sian countries as
these k\Is are mainly from Y# and
aurope.
To be more precise the investments from
the developed countries with their
investment in the emerin of developin
countries are from the bi Trans national
corporations that have stroner foothold in
world capital markets. Thus any kind of
investment either throuh openin of
wholly forein investment venture or doint
ventures with domestic companies of the
developin nations help in reater
valuation of the companies world stock
market increasin overall capitalieation.
_owever, there is a sinificant difference
between the composition of financial
capital assets between the more natured
economics and some of the nascent
economics. 'hile the increasin in
financial assets is more due to increases in
bankin deposits representin an immature
financial system in emerin economies
such as !hina. The larest contributor of
increasin financial assets in natured
economies especially like Ym and Y# is
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the increasin role of e%uities of and
securities and other corporate bonds.
tevertheless the fact cannot be
undermined that in more recent times, the
issuances of bonds and securities in
emerin markets have seen a sure in
financial capital. Y#$ has played a mador
role in financial capital market deepenin
both within the country and outside the
country i.e. the world financial capital
assets was u9v.1 trillion for the country
that accounts for nearly one"third of the
lobal total.
$lso the Y# forein investments in
overseas capital market have also played
an important role in achievin reater
financial interation. Yntil end of 200v
everythin looked rosy with bureonin
financial markets, increasin e%uities and
shares market and increasin reality sector
in the country. _owever the crisis bean in
wune 200( with the advent of sub prime
market crisis hittin the Y# market.
The sub prime lendin refers to the
lendin to house borrowers with weak
credit. Investment banks and lenders in
happy spree ave loan to the home from
the loan buyers at minimal or eero down
payment without proper credit verification.
In the process demand rose stressin the
prices as a result the house prices bean to
rise. The interest cost in eneral started
makin the borrowin costly. $s a result
many borrowers started defaultin.
letween 200^ and 200v a sub"prime
mortae worth u 1.9 trillion constitutin
19 percent of the total housin loan in Y#
were booked. These loans did not rise and
the reality sector rew.
lesides sub prime lendin by the
mortae findin aencies and banks, in
order to raise more money the banks,
packaed these loans into securities and
sold them to investment bank. This aainst
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amounted to voluminous percentae
shares that added up to u: trillion in 2009
of the total of u 10 trillion.
'hen the recession started in financial
markets, the house prices raised also the
interest rate rose that increased the cost for
borrowin. kirst few borrowers started
defaultin in cateories that were e&posed
to hiher interest rates and hiher risk.
This had a spill over effect to other risk
borrowins this addin to the number to of
defaulters. The mortae banks and real
estate aencies that were in lendin
business started makin hus losses. This
crisis became prominent in wune 200(
when the two sub prime mortae hede
funds manaed by lear streams collapsed
followed by sub prime mortaed by lt]
]aribas.
In barch 200Z the lear and #terns !hase
that brouht the company. This triered a
series of crisis and many other institutions
followed eh suit. The central bank of
$merica intervened and tried to improve
the situatin by lowerin of interest rates.
'ith the announcement of series of cuts in
interest rates on lendin situation was
averted temporarily.
$ain later in wuly and $uust 200Z, the
kamine bae and kreddie bac the
mortae iants faltered. kederal `eserves
pumped in 200 billion to ease the credit
situation. aven before the situation could
improve the yehman lrothers one of the
oldest investment bankin institution in
Y# field for bankruptcy.
_owever the company could not sustain
the market pressures. The other tow mea
iants $I[ and berrill yynch were also on
the brink of fallin. _owever these were
rescued by the bank of $merica that
bouht the berrill yynch and ked lends u
Z9 billion loan to $I[ this evertin the
crisis for two companies. In addition
'achovia roup came under pressure.
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*1</81> @7> +,25I>. P1 I;;21 CA2 -2;2//26 $I[
-+1 berrill yynch /@2 .512WB86;2> @7>
+*2@EB6+>. UE@<> .0D> /KJ7-+3 +*. @73
@5I*8M+ @7> U0851-4> *2E +,.5+/8 @73 berrill
yynch -+1 7 kederal `eserve C1<J8/8 /@73 $I[
CI3812 AV2E> Z9 C1/8-+@200E56D3 C2;+56D3
+*2@5<*23@+> @73 -56/7 ,1+ @1> CA2 +E@<>
8@+15868>. h*1*;<23, 7 8@+1586+ 'achovia
The initial impale was fall in the economy.
_owever it was not only restricted to fall
in total capital assets worth as the share
market also tripped sheddin more points
than over The valuation of the company
also reduced. _owever with increasin
lobal interation the shake in the Y#
market also had spill over effects to other
market. The well known his tropically
financial behemoth Ym capital market also
fell to the whims and fancies of the crisis,
some of the well known institutions in Ym
and its currencies came under pressure.
The upheavals crated by the crisis in Y#
credit market had implications for other
markets too. The impact on Indian market
can be analyeed throuh three different
dimensions, firstly its impact on Indian
stock market, secondly on its impact on
India currency and thirdly on Indian
institutions that invested in other markets
like Y# and aurope.
The countrys mador stork indices tumbled
down by more than v percentae points
after the announcement of bankruptcy of
yehman brother. _owever the l#a #ense
and tifty have been strulin ever since
the advent of sub prime crisis last year.
$fter reachin a bourse of 21000 in
wanuary 200Z the market indices had fallen
to 1291^ on 1v wuly 200Z.
aven before that shares could recuperate
from the previous turmoil the news on
three mador investment banks sent fresh
waves of shock in the stock markets.
kirstly, yehman brothers one of the top
investment banks of Y# field for
bankruptcy on 1v #eptember 200Z. This
was followed by another investment bank
berrill yynch fell almost on the brink on
the same day. lut before any mea crisis
hittin the company it was rescued by
lank of $merica which troll over for u z0
billion.
$nother financial iant $merican
E*</@7 *1</81>.
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*I3D +*. v @21> 8-+@. <*81@+ +*. @73
+3+-263D/7 *@KB8E/7> @7> 8@+1586+> yehman
brother. g+5.;+ +E@I 7 +,25<> 08@2BK3 /@73
q3C6+ l#a #ense -+1 tifty *I;8E+3 +*. @73
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@23 q+32EI512 @2E 200Z @+ 21000 /@2
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1291^ /@1> 1v q2E;62E 200Z.
g513 +-.07 +E@<> 21 08@2B<> 0*252A/+3 3+
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08,+;A@858> @5I*8M8> 8*83CA/8D3 </@8;3+3 3<+
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8@+1586+ yehman lrothers, 06+ +*. @1>
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berrill yynch *2E <GJ+/8 -1 +E@4 /@2 .512 @7>
*@KB8E/7> @73 6C1+ 0<5+. U;;I 7 8@+1586+,
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International [roup X$I[f the worlds
larest insurance bank collapsed. The
kederal `eserve saved the company from a
bier crisis by rantin then the loan
worth u Z9 billion for two years in
e&chane of (9.9 percent states in
company stock.
$part from the spillover of the events on
derivative and e%uity markets the vent also
had connotation related to reulatory
issues with respect to its bankin business
deals in India and its business outsourcin
operations in India. kate for the business
outsourcin branches for yehman lrothers
and berrill yynch in India remained
undecided.
Thouh, the investment bank turture of
wape areed to take over $sian"]acific unit
of yehman lrothers, some of its bankin
operations in auropean and biddle
aastern reion it is still not clear whether
the new company would be interested in
carryin the outstandin outsourcin
business in India. `eserve lank of India
overnin bodies it to sort out their swap
deals with the yehman. The bank
investment in derivative market was
estimated were estimated at `s. 900"v00
crores.
on the other hand the crisis in $I[ would
have limited impact on its the operation in
India with the Tata [roup as the latter
pleded to pump additional funds in case
of any crisis. The Tata roup reaffirmed its
insurers.
The !entral lank of India, X`lIf in its
policy measures issues in wake of crisis
hoped for recoveries soon, it considered
the overall economy to be more or less
insulted from the turmoil. India financial
system particularly the bankin system
would be affected in cases where it was
holdin a swap account or debt account for
the mea iants that were affected by the
crisis.
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+3IJ8/7> ,1+ @1> 8*1B8154/81> yehman lrothers
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g+5.;2 *2E 7 S5I*8M+ 8*83CA/8D3 turture of
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@7> q3C6+> *5.-81@+1 3+ C18EJ8@4/2E3 @1>
/E0FI/81> +3@+;;+,4> 08 @73 yehman. )
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06+ +3I-+0V7 /A3@20+, J8D5K3@+> *D> 7
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-5+@2A/8 <3+ ;2,+51+/0. +3@+;;+,4> 4 B5<2E>
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+G25I @1> @5I*8M8> *2E -5+@2A3 20.;2,+,
_owever the impact on Indian bankin
sector could be analyeed in terms of those
bankin institutions that are holdin
bonds, mutual funds or other funds in
other countries like aurope and Y.#.
$ccordin to a brokerae house adelweiss
!apital ytd. astimates the Indias leadin
commercial banks I!I!Is losses on
account of its investment in bonds and
debt by yehman amounted to u 200
million.
The flow of forein institutional investor~
investment en route capital market
participation has been immense in past few
years. The investments in the past have
helped the companies in manain the
re%uired fund needed for its rowth. The
mador investors have been mostly from the
countries like Y#, aurope, $ustralia, wapan
and some other $isn countries.
_owever since last year the investment
flows from Y# and aurope have slowed
down because of turbulence in the
domestic markets of these investin funds.
krom the net investors the kIIs inflows
turned intoned seller for the first half of
financial year 200Z"09.
_owever the Indian markets were
subdected to fall outs in Y# capital markets
in wuly"#eptember 200Z after the mea
insurance and bankin iants confirmed its
financial ill health. The l# #ense&
tumbled by more than 200 points on
account of the recent bankruptcy by
worlds top most banks. The #ensec inde&
fell from the 1:91Z.Z to 1:2v2.9 between
1v
th
#eptember and 1(
th
#eptember. $s a
result of which the kIIs tradin fell as
investor shed its stake in all mador
markets. In India kII# sold news of
international investment iants fallin.
These variabilitys are certainly oin to
deterirate the current balance of payment
for the country addin up to overall
deterioration in countrys balance of
payment for the country addin up to
+021F+6+ -8GI;+1+ 4 I;;+ -8GI;+1+ /8 I;;8>
BK58> .*D> /@73 hE5K*7 -+1 @1> )gU.
?A0GD3+ 08 <3+ B570+@208/1@1-. ,5+G862
adelweiss !apital ytd 8-@10I@+1 *D> 21
-25EG+68> 80*251-<> @5I*8M8> @7> q3C6+> I!I!I
BI381 ;.,D 8*83CA/8D3 /8 20.;2,+ -+1 B5<7
@7> yehman *2/I AV2E> 200 8-+@200E56D3
C2;+56D3.
) 524 @D3 =<3D3 J8/01-K3 8*83CE@K3
overall deterioration in countrys balance
of payment position.
The movements of India currency have
been more variables comported to its
values prior to 200(. This year the
currency initially appreciated due to
variety of domestic factors playin role.
The recent turmoil in the financial markets
weakened dollar in terms of mador
currencies. _owever after the spread of the
crisis in other mador capital markets the
dollar value strenthened aain.
The rupees have depreciated after the
crisis hit the market. The sellin pressures
due to forein institutional investment
repatriatin their capital by offloadin
their stakes in India in anticipation of
mador financial turbulence had further
added pressure on the values domestic
currency that is rupee. This would have
impact on balance of payment accounts
and the countrys investment strateies for
the country.
The new emerin $sian Tier that is
India have underone a sea chane in its
role frame the one that was primarily
known for k\I inflows, are now
proactively been involved in investin
abroad. _istorically well"known India
business houses like Tat, $mbani, lirla
and many other have inked deal with the
auropean companies. It is to be noted that
these investments are not affected by the
recent crisis as these are mainly into
infrastructural companies. lut some of the
ladin banks of India have to also invest
abroad in debt and security markets that
are most likely to be hit bye crisis.
These are mainly dominated by the larer
private sector banks like I!I!I, _\k! etc.
$part from these investors the others that
are likely to be hit"eh crisis are the
companies hose shares are listed in
t$#$\$ and tew ork #tock
a&chane. The market indices after the
recent crisis have pluned and have been
sheddin points. Thus the Indian
companies shares are also burnin its
finers from the crisis.
#hort term implications of this financial
turbulence can be seen more in terms of
increasin pressures on shot terms
investments enroute capital market. yon
term implication would be reducin the
rowth of capital and other assets,
decrease in valuation of total financial
assets, decrease in valuation of total
financial assets, decrease in lon term
investment both inflows as well as
outflows.
:
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financial#crisis.html