GlobalFinancialCrisis:ACatalystforchangeinGlobalEconomicParadigmProfessorB.P.SinghChairmanDelhiSchoolofProfessionalStudies&ResearchFormerly,Head&DeanFacultyofCommerce&BusinessDelhiSchoolofEconomicsUniversityofDelhiDelhiAgendaForPresentationAnatomyoftheDownturn:CauseandEffectHowithasbeenmanaged?FactorsaffectingEconomicSupremacyofaCountryPositionofUSAtill2008andcurrentpredictionsinthewakeofcurrentmeltdownChangingoutlookfor200910ContGlobalFinancialCrisis:ACatalystforchangeinGlobalEconomicParadigmCostofBankruptcyRestructuringoftheEconomy:ARemedyDimensionsofRestructuringAcquisitionsandRestructuringPolicyGoals:WhatStatesWantFromRestructuringAnatomyofthedownturnAcloserlookattheglobalcreditcrunchThecreditcrunchmayhaveitsrootsintheUS,butitsnowaglobalproblemTheRuddGovernmenthasmovedtoprotectbankdepositsforthenext3yearsGovernmentsinGreatBritain,Belgium,theNetherlands&evenIcelandhavebeenforcedtobailoutsomeoftheirbiggestbanksImportantly,theAustralianbankingsystem,whichismoreregulatedthanthatintheUS,hasheldupverywellJanuary2008March2007AnatomyofadownturnacloserlookattheglobalcreditcrunchUSFederalReservecutsinterestratesto0.75%amidfearstheUSeconomycouldfallintorecessionJPMorganbuysUSinvestmentbankBearStearnsinanemergencyrescuedealUSFederalReserveprovidesUS$200billiontocommercialbanksinanotherbidtofreeupmarketliquidityinadditionto$700billionannouncedbyUSGovt.torescuewallstreet.Cont.April2008InternationalMonetaryFundwarnslossesrelatedtothecreditcrunchcouldtopUS$1trillionCont.September20087September2008:USgovernmentseizescontrolofmortgagelendersFannieMaeandFreddieMac15September2008:LehmanBrothersfilesforbankruptcy.MerrillLynchisboughtbyBankofAmericaforUS$50billion16September2008:AmericanInternationalGroup(AIG),theUSsbiggestinsurer,receivesanUS$85billionloanfromtheUSFederalReservetostaveoffbankruptcy28September2008:USbank,WashingtonMutual,isseizedbyUSregulatorsinthebiggestUSbankfailureinhistoryCont.September200828September2008Britain,Belgium&theNetherlandsareforcedtobailoutseveralmajorbanks.USgovtAnnouncesUS$700billionplantorescueWallStreetUSHouseofRepresentativesnarrowlyrejectstheUS$700billionbailoutplanbyavoteof228-205,sendingglobalsharemarketstumbling29September2008CitigroupbidsforUSbankWachoviainadealbackedbyUSauthorities30September2008$55billiondollarsiswipedofftheAustraliansharemarketinasingledayOnedaylater,themarketrecoversbymorethan4%Cont.3October2008:Afterasecondvote,theUSHouseofRepresentativespassestheUS$700billionbailoutplan6-10October2008:Concernsthatbailoutplanwontpreventaglobalrecessionsendsglobalsharessliding:Japan-24.3%Europe-22.2%UK-21.0%US-18.2%Australia-15.6%October2008Thelistofcasualtieskeptgrowing.InthiswayithasbeenmanagedEconomicSupremacyofaCountrydependsuponitsstateintermsofHardandSoftPowerIn20072020,2030WeightofUSEconomyontheSkidsSince2000Source:IMF,WorldEconomicOutlookDB,Oct,2008GrowthRatePredictions.Source:IMF,WorldEconomicOutlook,2008Sincetheearly20thcentury, the US hasbeenthetopeconomic power intheworld.-WorldslargestconsumermarketTheUSseconomicweighthasfallensteadilysince2000.-2000: 32% 2007:around25%GlobalEconomyisexpectedtoslowdown.-Despiteariseinproductivitydrivenbytechnicalinnovation,global economic growth willslow overall due to agingpopulation and shrinkage ineconomicallyactivepopulationPositionofUSAtill2008PredictionsinthewakeofCurrentMeltdownEmergingeconomies,includingBRICs,aregrowingrapidly.-Averagegrowthof6.9%during2002-2007(Globaleconomygrew3.3%)-WeightofBRICs:5.3%in199212.8%in2007Emerging countries will leadtheglobaleconomicgrowth.-US: 2-3% growth (inflow ofimmigrantsandproductivityimprovement)-Euro:2-3%1-2%growth(shrinkinglaborpopulation)-Japan: 1-2% growth (rapidlyagingpopulation)-China:6-7%growth4-5%growth from 2020 (decliningeconomicallyactivepopulation&slowingproductivitygrowth)PositionofUSAtill2008(Cont)PredictionsinthewakeofCurrentMeltdown(Cont)Chinashowedespeciallyfastgrowth.-Annualaveragegrowthof10%sinceenteringWTOin2001-IMFpredictsChinawill overtake Japanin 2010 to becometheNo.2economy-India:6-7%growth(growingpopulationandproductivityimprovement)Asearlyas2026,ChinamayreplacetheUSastheworldslargesteconomy.IndiaisexpectedtoovertakeJapanin2023.Economic weight of BRICswillcontinuetorise.-16.1% in 2010 25.1% in202031.7%in2030PositionofUSAtill2008(Cont)PredictionsinthewakeofCurrentMeltdown(Cont)USholdsdominantpositionin all areas that createfinancialpower;financialhub,centeroffinancialassets&institutions.-US holds 56.1% of theworldsfinancialassets34%ofbonds(asof2006)Stockmarketcapitalization:4.5timesthatofJapan,theworldssecond-largestmarketFinancialpowerofEuropeandemergingcountrieswillstrengthen.-SignificantadvancementexpectedinsovereignwealthfundsandemergingcountriesPositionofUSAtill2008(Cont)PredictionsinthewakeofCurrentMeltdown(Cont)-Among the worldstenmajorbanks,threeareUSbanks-New York is theglobalfinancialhubExceptforLondon,mostotherfinancialhubsspecializeinnarrowfinancialservicesAbsolute financial power ofthe US will weaken but itssuperiorstatuswillcontinue.- In the wake of the financialcrisis,theUSfinancialindustrywillundergoatemporarycontractionPositionofUSAtill2008(Cont)PredictionsinthewakeofCurrentMeltdown(Cont)USmaintainsfinancialpower based on its keycurrencystatusandadvancedfinancialacumen.-USDollarRecyclingMechanismUSscurrentaccountdeficitIncreasingliquidityincountrieswithcurrentaccountsurplusSwellingforeigncurrencyreservesofthesecountriesInvestmentintheUS-US will continue toholdcompetitivenessthankstolargecomprehensivefinancialgroupsCommercialbanks & investmentbankscombinedPositionofUSAtill2008(Cont)PredictionsinthewakeofCurrentMeltdown(Cont)-UShasqualityworkforce,corefactoroffinancialindustryFinancialcrisiscausedcontractioninUSinvestmentbanks.Financialpowerwillbedivided between the US andEurope.Impact of Chinas rapidlygrowingfinancialpowerwillbelimitedtoAsiaPositionofUSAtill2008(Cont)PredictionsinthewakeofCurrentMeltdown(Cont)Changingoutlookfor2009Source:“TheImplicationsoftheGlobalFinancialCrisisforLow-IncomeCountries”,InternationalMonetaryFund,March2009.LICs=LowIncomeCountries(WEO:WorldEconomicOutlook)*Cont.Source:“TheImplicationsoftheGlobalFinancialCrisisforLow-IncomeCountries”,InternationalMonetaryFund,March2009.LICs=LowIncomeCountriesNote:TheEconomicPowerIndex(EPI)representsscoresbasedonthesumofcomparativeoutlookinsevenareas(US=100)economicscale,keycurrency,financialpower,resource-securingcapability,science&technology,regionalleadership,andglobalgovernance.AnEmergingPolarityinGlobalStructureby2030EconomicPowerIndexGlobal Financial Crisis: A Catalyst forChangeinGlobalEconomicParadigmTheglobalfinancialcrisispavedthewayforChinatoshortenbymorethantwoyears,fromthetimenecessarytocatchupwithindustrializedcountries,includingtheUS.TheUSandEuropeunderwent“twolostyears”duetothefinancialcrisisandJapanfor4-5years.(IMF,2008)ChangeinkeycurrencyandinternationalmonetarysystemCont.EmergingPolarityTheUSmaintainsthelargestcloutintheworld:thankstoitsdefenceandtechnologicalsuperiority.Oncebecomespoliticallyintegrated,Europewillemergeasakeyforceininternationalpeaceandmediationworkonthebackofitssoftpowerandnewvalues.Backedbyitshugeeconomicscale,ChinawilllikelyplaytheroleoftheepicentreofAsiaandemergingmarkets.Cont.Thenext20years(2010-2030)willbeaperiodoftransitioninglobaleconomicorderTheUShegemonywillgraduallyweakenKeyvariableintheshiftofglobaleconomicorderwillbetheemergenceofBRICcountries,especiallyChina.Cont.ThebiggestuncertaintyshalllayonhowChinaandIndiawillevolveintermsoftheirdiplomaticrelationsinthefutureThemostimportantvariableinthisrelationshipwoulddependuponhowChinaspoliticalandeconomicsystemswillgrowandtakeshape.CostofBankruptcy.BankruptcyHistoricalVignettesThepenaltyfordeclaringbankruptcyinAncientRomewasslaveryorbeingcuttopieces.Thechoicewaslefttothecreditor.BytheMiddleAges,thetreatmentofinsolventdebtorshadsoftenedconsiderably.InNorthernItaly,bankruptdebtorshittheirnakedbacksidesagainstarockthreetimesbeforeajeeringcrowdandcriedout,“Ideclarebankruptcy.”InFrenchmedievalcities,bankruptswererequiredtowearagreencapatalltimes,andanyonecouldthrowstonesatthem.-Source:WorldBank,DoingBusinessin2004RestructuringoftheEconomy:ARemedyTopromoterecoveryinacrisis-affectedeconomy,itisessentialtolinktogetherarestructuringofthefinancialandthecorporatesectors,aso-calledrapidsequencingrestructuringoftheeconomy.DimensionsofrestructuringsAssetrestructuringAcquisitionsDivestituresSpinoffsCorporatedownsizingOutsourcingCont.Restructuringownershipstructure,leverageExchangeoffersSharerepurchasesLBO(Leveraged buyouts)LCOs(Leveragedcashouts)Acquisitions and Restructuring Corporate Restructuring Divestitures (sell-offs versus spin-offs)Spin-offSpin-off represents a pro-rata distribution of shares of a subsidiary to shareholders.Occurs within the hierarchy.Terms and valuation of the assets are set internally Parent stockholders create new board & TMT.Parent can maintain ties with spun-off unit.ContSell-offSell-offs: Assets are sold to another firm for cash and/or securities.Occurs outside the hierarchy. Value determined by market forces.Acquiring firm absorbs and governs the sold-off assets as part of its hierarchy.WhichwayisthebesttoRestructureisalwaysbasedontheobjectivesofRestructuring.PolicyGoals:WhatStatesWantFromRestructuringENSUREOPPORTUNITYFORRESIDENTIALANDSMALLBUSINESSPARTICIPATIONENCOURAGEGROWTHOFEFFICIENT,COMPETITIVEGENERATIONOFMARKETACHIEVEBROADCUSTOMER&NEWALTERNATIVESUPPLIERPARTICIPATIONCont.ADDRESSTRANSITIONALUNECONOMIC“STRANDEDCOSTS”RETAINSYSTEMBENEFITS(RELIABILITY,LOW-INCOMEASSISTANCE,CONSERVATION&RENEWABLES)Thank You All For the Patient Listening ! For Further Queries Contact us at : drbpsingh1958gmail.com