2553 words essay on world financial crisis

In modern world, financial crisis at world level can be traced back to 1920’s, when economic depression of 1929 occurred. It is said that history repeats itself. Today’s world financial crisis which started with mortgage crisis is only one aspect of history.

Crisis began with sub-prime lending crisis and whole financial system was engulfed. Sub-prime crisis refers to the crisis faced by the mortgage companies that were in loaning business that due to adverse situations ran in trouble. As a result the number of defaulters increased resulting in huge bad debts for the mortgagee companies.

Several of world’s best managed financial institutions went bankrupt and rests are dying for bail out. The world demand cycle is heading south and its impact is visible in world petroleum prices and auto manufacturer’s recent outcry for bailout. The liquidity is engulfing the whole world and taking the shape of financial famine.

In the period of strong global growth growing capital flow and prolonged stability market participant sought higher output without an adequate calculation of the risks and failed to exercise proper due diligence. Weak underwriting standards, unsound risk management practices increasingly complex and opaque financial products and consequent excessive leverage combined to create vulnerabilities in the system.

At the same time what looked as brisk-effervescence is financial market ended up in becoming alarm ringer for a greater catastrophe in the coming years. This was started with a small upheaval created by the sub prime crisis in 2007 in the world’s largest and most significant financial markets U.S. later in 2008 the whole of brink of falling apart. Apart from expansion the deepening of financial markets occurred for most of the courtiers in recent times.

The growths in financial capital asses for the countries have been much faster than the respective countries GDP growth. South financial times sector where the financial depths have increased to more than 400-500 times the GDP of these countries.

However, the financial capital assets have surged manifolds for the countries such as new emerging economics of Asia Russia, Eastern European countries and some of the Middle East countries thought are late entrant. Many factors have contributed to the countries success in reaching such a phenomenal increase.

One of the major reasons for the expansion in financial markets is the efficiency brought about the natured capital market growth. This rendered facilitated corporate borrowing. It increased the corporate borrowing through issuance of shares public traded bonds the securities by these companies in the capital market.

Apart from increased issuance of public traded bonds, shares and equities the increasing valuations of the companies and foreign investments have helped the countries in escalating the role and importance of capital market. Rising equities values from stronger corporate earning, issuance of asset backed securities rising asset price and government debts have helped in increasing eh countries’ financial depth.

Apart from the above mentioned factors, globalization also helped in enhancing the role played by foreign investment in the spreading the financial sector growth to other peripheral nations that were outside the core hub of new financial capitalization. Whereas role of foreign institutional investment (FIIs) that invests thorough capital market for short term gains directly impact the capital market deepening.

The foreign direct investments (FDIs) directly invest in countries for long term financial prospects. These have increased the financial market deepening as well. The FDI investment in developing countries bring in with the greater financial habits. US and European markets are known to be financial capital market hub and have greater exposure to the secondary and derivative market operations. Besides increasing the financial growth its operation in FDIs help in increasing the valuation of the companies in the emerging market like China, India and other Asian countries as these FDIs are mainly from US and Europe.

To be more precise the investments from eh developed countries with their investment in the emerging of developing countries are from the big Trans national corporations that have stronger foothold in world capital markets. Thus any kind of investment either through opening of wholly foreign investment venture or joint ventures with domestic companies of the developing nations help in greater valuation of the companies world stock market increasing overall capitalization.

However, there is a significant difference between the composition of financial capital assets between the more natured economics and some of the nascent economics. While the increasing in financial assets is more due to increases in banking deposits representing an immature financial system in emerging economies such as China. The largest contributor of increasing financial assets in natured economies especially like UK and US is the increasing role of equities of and securities and other corporate bonds.

Nevertheless the fact cannot be undermined that in more recent times, the issuances of bonds and securities in emerging markets have seen a surge in financial capital. USA has played a major role in financial capital market deepening both within the country and outside the country i.e. the world financial capital assets was $56.1 trillion for the country that accounts for nearly one-third of the global total.

Also the US foreign investments in overseas capital market have also played an important role in achieving greater financial integration. Until end of 2006 everything looked rosy with burgeoning financial markets, increasing equities and shares market and increasing reality sector in the country. However the crisis began in June 2007 with the advent of sub prime market crisis hitting the US market.

The sub prime lending refers to the lending to house borrowers with weak credit. Investment banks and lenders in happy spree gave loan to the home from the loan buyers at minimal or zero down payment without proper credit verification.

In the process demand rose stressing the prices as a result the house prices began to rise. The interest cost in general started making the borrowing costly. As a result many borrowers started defaulting. Between 2004 and 2006 a sub-prime mortgage worth $ 1.5 trillion constituting 15 percent of the total housing loan in US were booked. These loans did not rise and the reality sector grew.

Besides sub prime lending by the mortgage finding agencies and banks, in order to raise more money the banks, packaged these loans into securities and sold them to investment bank. This against amounted to voluminous percentage shares that added up to $3 trillion in 2005 of the total of $ 10 trillion.

When the recession started in financial markets, the house prices raised also the interest rate rose that increased the cost for borrowing. First few borrowers started defaulting in categories that were exposed to higher interest rates and higher risk. This had a spill over effect to other risk borrowings this adding to the number to of defaulters. The mortgage banks and real estate agencies that were in lending business started making hugs losses. This crisis became prominent in June 2007 when the two sub prime mortgage hedge funds managed by Bear streams collapsed followed by sub prime mortgaged by BNP Paribas.

In March 2008 the Bear and Sterns Chase that brought the company. This triggered a series of crisis and many other institutions followed eh suit. The central bank of America intervened and tried to improve the situating by lowering of interest rates. With the announcement of series of cuts in interest rates on lending situation was averted temporarily.

Again later in July and August 2008, the Famine Mae and Freddie Mac the mortgage giants faltered. Federal Reserves pumped in 200 billion to ease the credit situation. Even before the situation could improve the Lehman Brothers one of the oldest investment banking institution in US field for bankruptcy.

However the company could not sustain the market pressures. The other tow mega giants AIG and Merrill Lynch were also on the brink of falling. However these were rescued by the bank of America that bought the Merrill Lynch and Fed lends $ 85 billion loan to AIG this everting the crisis for two companies. In addition Wachovia group came under pressure.

The initial impale was fall in the economy. However it was not only restricted to fall in total capital assets worth as the share market also tripped shedding more points than over The valuation of the company also reduced. However with increasing global integration the shake in the US market also had spill over effects to other market. The well known his tropically financial behemoth UK capital market also fell to the whims and fancies of the crisis, some of the well known institutions in UK and its currencies came under pressure.

The upheavals crated by the crisis in US credit market had implications for other markets too. The impact on Indian market can be analyzed through 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 US and Europe.

The country’s major stork indices tumbled down by more than 6 percentage points after the announcement of bankruptcy of Lehman brother. However the BSE Sense and Nifty have been struggling ever since the advent of sub prime crisis last year. After reaching a bourse of 21000 in January 2008 the market indices had fallen to 12514 on 16 July 2008.

Even before that shares could recuperate from the previous turmoil the news on three major investment banks sent fresh waves of shock in the stock markets. Firstly, Lehman brothers one of the top investment banks of US field for bankruptcy on 16 September 2008. This was followed by another investment bank Merrill Lynch fell almost on the brink on the same day. But before any mega crisis hitting the company it was rescued by Bank of America which troll over for $ %0 billion.

Another financial giant American International Group (AIG) the world’s largest insurance bank collapsed. The Federal Reserve saved the company from a bigger crisis by granting then the loan worth $ 85 billion for two years in exchange of 79.9 percent states in company stock.

Apart from the spillover of the events on derivative and equity markets the vent also had connotation related to regulatory issues with respect to its banking business deals in India and its business outsourcing operations in India. Fate for the business outsourcing branches for Lehman Brothers and Merrill Lynch in India remained undecided.

Though, the investment bank Nurture of Jape agreed to take over Asian-Pacific unit of Lehman Brothers, some of its banking operations in European and Middle Eastern region it is still not clear whether the new company would be interested in carrying the outstanding outsourcing business in India. Reserve Bank of India governing bodies it to sort out their swap deals with the Lehman. The bank investment in derivative market was estimated were estimated at Rs. 500-600 crores.

on the other hand the crisis in AIG would have limited impact on it’s the operation in India with the Tata Group as the latter pledged to pump additional funds in case of any crisis. The Tata group reaffirmed its insurers.

The Central Bank of India, (RBI) 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 banking system would be affected in cases where it was holding a swap account or debt account for the mega giants that were affected by the crisis.

However the impact on Indian banking sector could be analyzed in terms of those banking institutions that are holding bonds, mutual funds or other funds in other countries like Europe and U.S. According to a brokerage house Edelweiss Capital Ltd. Estimates the India’s leading commercial banks ICICI’s losses on account of its investment in bonds and debt by Lehman amounted to $ 200 million.

The flow of foreign 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 managing the required fund needed for its growth. The major investors have been mostly from the countries like US, Europe, Australia, Japan and some other Aisn countries.

However since last year the investment flows from US and Europe have slowed down because of turbulence in the domestic markets of these investing funds. From the net investors the FIIs inflows turned intoned seller for the first half of financial year 2008-09.

However the Indian markets were subjected to fall outs in US capital markets in July-September 2008 after the mega insurance and banking giants confirmed its financial ill health. The BS Sensex tumbled by more than 200 points on account of the recent bankruptcy by worlds top most banks. The Sensec index fell from the 13518.8 to 13262.9 between 16^th September and 17^th September. As a result of which the FIIs trading fell as investor shed its stake in all major markets. In India FIIS sold news of international investment giants falling. These variability’s are certainly going to deterirate the current balance of payment for the country adding up to overall deterioration in country’s balance of payment for the country adding up to overall deterioration in country’s balance of payment position.

The movements of India currency have been more variables comported to its values prior to 2007. This year the currency initially appreciated due to variety of domestic factors playing role. The recent turmoil in the financial markets weakened dollar in terms of major currencies. However after the spread of the crisis in other major capital markets the dollar value strengthened again.

The rupees have depreciated after the crisis hit the market. The selling pressures due to foreign institutional investment repatriating their capital by offloading their stakes in India in anticipation of major 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 country’s investment strategies for the country.

The new emerging Asian Tiger that is India have undergone a sea change in its role frame the one that was primarily known for FDI inflows, are now proactively been involved in investing abroad. Historically well-known India business houses like Tat, Ambani, Birla and many other have inked deal with the European companies. It is to be noted that these investments are not affected by the recent crisis as these are mainly into infrastructural companies. But some of the lading 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 larger private sector banks like ICICI, HDFC etc. Apart from these investors the others that are likely to be hit-eh crisis are the companies hose shares are listed in NASADAQ and New York Stock Exchange. The market indices after the recent crisis have plunged and have been shedding points. Thus the Indian companies’ shares are also burning its fingers from the crisis.

Short term implications of this financial turbulence can be seen more in terms of increasing pressures on shot terms investments enroute capital market. Long term implication would be reducing the growth of capital and other assets, decrease in valuation of total financial assets, decrease in valuation of total financial assets, decrease in long term investment both inflows as well as outflows.