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Published by Ali Al-Olyan

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Published by: Ali Al-Olyan on Nov 17, 2011
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11/17/2011

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Ali Al-Olayan (12408120)International FinanceTHE SITUATION BEFORE 2011: A PERSPECTIVEAfter the shocking bankruptcy of investment bank Lehman Brothers on September 15, 2008the global economy rapidly plunged into a rapid decline. Consumer and business confidence broke down and credit flows to the private sector was cut off. In addition, just before that central banks had been seduced and completely blinded byhigh oil prices which caused them to keep interest rates high against inflationdespite the revealing signs of an impending financial crisis. The just-born G20group were spurred into action during the winter of 2008 and 2009, where interest rates were retrenched; electronic money was created through quantitative easing (which is the practice of increasing the supply of money in order to positively generate economic activity); and a number of fiscal stimulus â
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packagesâ
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were announcby governments.Since policy interest rates in countries including UK, Japan, and US were so close to the zero nominal interest rate floor, and monetary transmission mechanismshad been more or less rendered ineffective, fiscal policy (namely, economic stimulus packages) was turned to for (at least) short term macroeconomic stability.The total amount of stimulus announced equaled about $692 billion for 2009, which measures to a bit over 1.1 percent of global GDP, which was short of the 2 percent IMF suggested was needed. US (39%), China (13%), and Japan (10%) accountedfor almost $424 billion of the total stimulus in 2009. France, on the other hand proposed a stimulus amounting to only 0.7% of GDP. In the following year of 2010, US accounted for over 60% of the stimulus, while China (15%) and Germany (10%) were next in line. Government stimulus plans were largely either tax cuts orspendingâ
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where countries including Brazil, Russia and the U.K. focused mostly on taxcuts and others, including Argentina, China and India, mostly proposed spendingmeasures to stimulate domestic demand. Countries that benefited more from the stimulus were Germany, Canada, China, Switzerland, and some Nordic countries while countries such as Greece, Italy, Iceland, Japan, and Ireland did not fair as well.By mid-2010, budget deficits had enlarged, due to high non-discretionary welfarespending, large bank bailouts and dreadfully meek fiscal packages. Greece, in particular, had great difficulty in collecting taxes and their budget deficits had ballooned to an outrageous level which inevitably led to a sovereign debt crisis, but they were not alone as Ireland, Italy, Spain and Portugal also fell out.The widening of bond yield spreads (where 10-year Portegeuse bonds increased to7.6%, Irish bonds to 8.1%, and Greek bonds skyrocketing to a nasty 12.8%) and risk insurance on credit default swaps caused a crisis of confidence amongst manyEU members most especially Germany. On May 9, 2010 Europe's finance ministers sanctioned a rescue package worth 750 billion euros through what they called â
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European Financial Stability Facility (EFSF)â
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to ensure financial stability. Its first bailout was for Ireland, where it granted a five-year bond of 5 billion euros, fixedat mid-swap plus 6 basis points which imply borrowing costs for EFSF of 2.89%.The second bailout was for Portugal, and by June 2011 it had issued a total of 8billion euro 10-year-bond.in February 2009, The World Bank reported that the Middle East wasnâ
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t greatly affected by the disaster. The Gulf Cooperation Council (GCC) was in the best positionto encounter the economical shocks. The GCC countries entered the crisis in a practically strong position. With generally good harmony of payments standings coming into the crisis or with alternative essence of financing for their huge current account voucher, such as allowance, Foreign Direct Investment (FDI) or foreign aid, the Arabian countries were agile to evade going to the market in the latter part of 2008. This gives them a greater advantage against the global recession. The greatest impact of the global economic crisis will come in the form of lower oil prices, which maintain to be the single most significant determinant ofeconomic performance. Steadily declining of oil prices would stress them to godown on reserves and cut down on investments. Significantly lowering oil pricescould cause a dissolution of the world economics as has been the case in past oi

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