Financial crisis 2008

International FinanceKT40_Diplomatic Academy of Vietnam

Financial crisis 2008-2009

1. Pham Tuyet Mai2. Nguyen Thi Huong3. Khong Thi Huong4. Tran Van An5. Ngo Thi Thuy Linh

CONTENTI. Reasons of financial crisis 2008-2009II. Developments of financial crisis 2008-2009III. Consequences of financial crisis 2008-2009

1. Short-term consequences 2. Major responses in the world3. Long-term consequences

I. Reasons of the financial crisis 2008-20091. Flexible monetary policy of the US has lasted too long

=> Flexible monetary policy for a long time formed the real estate bubble in the US

• The real estate bubble

Low interest rateIncreasing the

borrower to buy house

House price was increasing

Subprime mortgage rapidly

developing

I. Reasons of the financial crisis 2008-2009

• Outbreak of derivative securities

MBS

CDS

Closed relation

between real estate market and financial

market


The real estate bubble bursted

The house price

decreased

The banks realize

value own house

could not offset value

of loansPrice of stock, bond reduced sharply (MBS)


II. Developments of the financial crisis 2008-2009

- Many banks incurring subprime loans suffered heavy losses

Bankruptcy situation 2007-2008, source: World Bank

• 3/2008: Bear Stearns was forced to sell itself to JP Morgan for $ 10 per share

• 7/9/2008: Fannie Mae and Freddie Mac was nationalized. The Federal Reserve System (Fed) has spent $ 200 billion as lifeline for these companies.


• 15/9/2008: Lehman Brothers went bankrupt


• 10/2008: Dow Jones indexes lost 25% of its value after one month

• 10/2008: global stock market lost ~ 50% ($28.7 trillion)

The Dow Jones index in the period from 16/09/2008 to 6/10/2008 Source: Federal Reserve System (FED)

• QIII / 2008: The US economy fell into recession with a faster rate, about minus 0.3%

• 18/11/2008: Japanese official announced fall into recession with consecutive negative growth in two quarters II and III

• Many governments had to spent billions of dollars on the rescue package


The financial system collapsed

The stock market strongly declined

Real estate prices plummeted

Prices of most commodities in the world were plunged

The interest rate was unstable

The dollar gained against other currencies

1

2

3

4

5

6

III. CONSEQUENCES OF THE FINANCIAL CRISIS 2008-20091. IN SHORT - TERM

(1) The financial system collapsed

III. CONSEQUENCES OF THE FINANCIAL CRISIS 2008-20091. IN SHORT-TERM

(2) The stock market strongly declined


Source: IMF

(3) Real estate prices plummeted

Price


(4) Prices of most commodities in the world were plunged


(5) The interest rate was unstable


Source: IMF, WOE

(6) The dollar gained against other currencies


1. Immediate support for liquidityGuarantee for debts

France Netherlands Germany Korea0

100

200

300

400

500

600

billion USD

IMF 2010, Crisis Management and Resolution, International Monetary Fund.

III. CONSEQUENCES OF THE FINANCIAL CRISIS 2008-20092. MAJOR RESPONSES

Takeover or providing direct capital for main manufacturing.

Country Sector/big company amount of money

America Automobile Manufacturing/

General Mortor, Chrysler

17.4 billion USD

EU small and medium

companies

30 billion EURO

Canada Automobile and

infrastructure

3 billion USD

France Automobile and

infrastructure

19 billion EURO



b. Flexible monetary policy- Lowering interest rates

Country Interest rate in 2007 Interest rate in 2008

America 5.35% 0.25%

England 5.5 2.00%

- Change exchange rate to promote export which supports economic development.



c. Reconstruction for financial corporations. - (M&A) in European countries - Nationalizationd. Fiscal policy: - Providing stimulus packages, decreasing tax and increasing subsidy


Country Stimulus package

(billion USD)

GDP 2007

(billion USD)

Rate of

package/GDP

America 878 13483 6.0

China 586 3218 18.2

Japan 275 4384 6.3

Russia 250 1289 19.4

Germany 81 3197 1.2

India 61 1099 5.6

England 30 2773 1.1

France 26 2560 1.3

Spain 14 1439 1.0

d. Fiscal policy: - Adding more money into bank system- Cutting down taxes and giving more subsidies


a. The public-debt crisis

III. CONSEQUENCES OF THE FINANCIAL CRISIS 2008-20093. IN LONG-TERM

Controlling bad debts and

stimulating demand

Public-debt crisis

Economic recession

b. The risk of a new financial crisisCause: existing problem

Vulnerable economy

Underground banks

Public debtLack of structure reforms

Stability of Emerging economies


b. The risk of a new financial crisisSignals in Asia:

Financial market weakened;Goods price fell;Expectation of investors.


c. The backlash against globalization

Wide spread of crisis

Slow economic recovery

Anti-globalization


c. The backlash against globalization


Anti-globalization

Trade barriers

Policies favoring domestic

firms, workers

Anti-immigration

State capitalism

Members evaluationCONTENT Presented by I. Reasons of financial crisis 2008-2009

Nguyen Thi Huong – KT40A

II. Developments of financial crisis 2008-2009

Tran Van An – KT40A

III. Consequences of financial crisis 2008-20091. Short-term consequences Ngo Thi Thuy Linh – KT40A2. Major responses in the world Khong Thi Huong – KT40B

3. Long-term consequences Pham Thi Tuyet Mai – KT40A

Financial crisis 2008

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