global credit crunch

Global Credit Crunch A quick guide to how the credit crunch unfolded

13th October 2008

The source of Information for this presentation is BBC News website

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Most analysts link the current credit crisis to the sub-prime mortgage business, in which US banks give high-risk loans to people with poor credit histories. These and other loans, bonds or assets are bundled into portfolios - or Collateralised Debt Obligations (CDOs) - and sold on to investors globally.

Falling house prices and rising interest rates lead to high numbers of people who cannot repay their mortgages. Investors suffer losses, making them reluctant to take on more CDOs. Credit markets freeze as banks are reluctant to lend to each other, not knowing how many bad loans could be on their rivals' books.

The impact of the sub-prime mortgage crisis is quickly shown to have implications beyond the United States.

Losses are felt by investment banks as far afield as Australia. Several high yield deals in industry are put on hold, citing market conditions.

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The US Federal Bank and the European Central Bank tries to bolster the money markets by making funds available for banks to borrow on more favourable terms.

Interest rates are also cut in an effort to encourage lending.

But the short-term help does not solve the liquidity crisis - or availability of cash for banks - as banks remain cautious about lending to each other.

A lack of credit - to banks, companies and individuals - brings with it the threat of recession, job losses, bankruptcies, repossessions and a rise in living costs.

UK bank Northern Rock seeks an emergency loan to stay afloat, prompting a "run" on the bank, as worried customers withdraw £2bn. The bank is later nationalised. In the US, the near-collapse of Bear Stearns leads to a crisis of confidence in the financial sector and the end of investment-only banks.

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Seeking a long-term solution, the US government agrees a $700bn bail-out that will buy up Wall Street's bad debts in return for stake in the banks. The US government plans to borrow the money from world financial markets and hopes it can sell the distressed assets back once the housing market has stabilised.

The UK government launches its own bail-out, making £400bn extra capital available to eight of the UK's largest banks and building societies in return for preference shares in them. In return for its investment, the government expects to get a stake in the banks - although exactly how much is not quite clear yet.

Economies around the world are affected by the credit crunch. Governments move to nationalise banks from Iceland to France. Central banks in the US, Canada and some parts of Europe take the unprecedented step of co-ordinating a half-point percent cut in interest rates in an effort to ease the crisis.

10Shares have risen and fallen with news of failures, takeovers and bail-outs. In part, this reflects investors' confidence in the banking system. While bank shares have been hammered because of exposure to bad debt, retailers have been hit as consumer confidence is shaken by falling house prices and job insecurity.

US Dow Jones lost 40%DURING

LAST

ONE

YEAR

UK FTSE 100 lost 40%

* Change % represents change w.r.t. Previous Day

Germany DAX lost 43%

DAX 30 (Deutscher Aktien IndeX 30) is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange.

The Dow Jones Industrial Average (DJIA, Dow 30) consists of 30 of the largest and most widely held public companies in the United States

The FTSE 100 Index (Financial Times Stock Exchange Index) is a share index of the 100 most highly capitalised companies listed on the London Stock Exchange.

The following table lists the 33 FTSE 100 companies which had a market capitalisation of £10 billion or more on 31 December 2007, the last trading day of 2007.

DURING

LAST

ONE

YEAR

Paris CAC 40 lost 46%

Japan Nikkei 225 lost 47%


India SENSEX lost 41%

The CAC 40 (Cotation Assistée en Continu) (Continuous Assisted Quotation)), is a benchmark French stock market index of the 40 most significant values among the 100 highest market caps on the Paris Bourse .

http://www.nni.nikkei.co.jp/CF/FR/MKJ/list_nikkei_constituents.cfm

Nikkei225 is a stock market index for the Tokyo Stock Exchange (TSE).

The BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-weighted index composed of 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange.



Rupee has weakened

considerably against USD

and Euro


DURING

LAST

ONE

YEAR

There are no signs of Rupee

appreciation in near future because

Dollar-Rupee exchange rate is a

function of Demand-Supply

and there seems to be more demand

(by FIIs and Indian Banks foreign

operations) than the supply.

Governments Response - Worldwide

US debt clock runs out of digits

The US government's debts have ballooned so badly the National Debt Clock in New York has run out of digits to record the spiralling figure.

The digital counter marks the national debt level, but when that passed the $10 trillion point last month, the sign could not display the full amount.

The clock's owners say two more zeros will be added, allowing the clock to record a quadrillion dollars of debt.

Some economists believe the $700bn bail-out plan for ailing US financial institutions could send the national debt level to $11 trillion.

global credit crunch

Economy & Finance