IMPACT OF CREDIT CRISIS

IN INTERNATIONAL
BUSINESS

SUBMITTED BY,

RASHMITA RANJAN

SHEBIN MA
INTRODUCTION

Credit crisis is a reduction in the general availability of loans or a

sudden tightening of the condition required to obtain a loan from the
banks. A credit crunch generally involves a reduction in availability of
credit independent of a rise in official interest rates. In such situation the
relationship between credit availability and interest rates has implicitly
changed, such that either credit becomes less available at any given
official interest rate, or there ceases to be a clear relationship between
interest rates and credit availability.

The present credit crisis is global, triggered by a liquidity short fall

in the banking sector. This crisis contributed to the failure of important
business, declines in consumer wealth estimated in the trillion of US
dollars and a significant decline in economic activity. This credit crisis
affected many areas of the global economy. Global trade has experienced
a stunning collapse in the credit crisis. The world trade organisation
estimated a decrease in trade activities of 9% in 2009. Currently, both
imports and exports have splurged in major trading countries.

Impact of credit crisis in BRIC countries

THE BRIC COUNTRIES

Brazil, China, India, and Russia (BRIC) were collectively one of the strongest
economies of the world, with growth rates that were higher than the well
established industrial countries of Europe, Japan, and the U.S. For example,
between 2002 and 2008, China’s economy grew on an average of 10 percent per
year. Similarly, India’s economy grew by an average of 8 percent per year. But,
the recent economic crisis that is fanning the world has also affected these high
flying four economies with potential to derail their phenomenal resurgence in
the world economic order.

We have seen many ups and downs in the global economy due to
credit crisis. The break – down of the credit markets has triggered fear and
uncertainty across financial markets in BRIC countries. The crisis has triggered
a profound liquidity crunch not just among vehicles supporting mortgage debt,
but across a wide array of asset classes. Mortgage tenders are not lending at fair
and logical rates even to prime borrowers.

BRAZIL

Brazil, part of the high flying BRIC economies had a robust five years
average growth of 4.6 percent, a substantial flow of foreign capital of 328
billion and a surplus in its current account balance. The globalization and its
resulting decoupling of the economies were supposed to protect countries in
regions that did not create or participate in the economic downturn and, hence,
continue their drive for economic sustainability. But, Brazil’s economic data
released in February confirmed that decoupling was just another myth. Indeed,
the Brazilian economy hit the proverbial BRIC wall, with industrial production
plunging 14.5 percent.
The credit crisis in Brazil affected the larger infrastructure projects and
the government unable to prevent, some projects being cancelled. It has a
serious impact on Brazil’s agriculture and agribusiness, a crucial source of both
foreign exchange and employment.

RUSSIA

For the last five years, Russia was one of the shining stars of the
emerging markets, with huge current account surpluses, massive capital flows,
and towering international reserves . Its geographic location astride the Eurasian
land mass left it well-prepared to cater to the fastest growing markets on the
planet. With its vast natural resources, well-educated workforce and treasure-
trove of financial resources Russia became the envy of the world.
The Russian markets held up well, initially withstanding the credit crunch that
was savaging much of Europe and North America. But, the wheels began
coming off the Russian behemoth during the third quarter of last year, and, now
it finds itself in a mess similar to the one it faced in 1998. A problem faced by
Russia is its reliance on commodities to drive its economy. Despite Moscow’s
attempt to move the economy up the value-added chain, it is still based on
commodities. Energy and metals remain the dominant sectors of the economy.
Therefore, the collapse in commodity prices was a devastating blow for Russia.
The effects of global credit crunch are compounded by domestic factors,
particularly a lack of confidence on the part of foreign investors in Russia. The
impact of crisis on Russia has so far been minimal because the crisis has been
received little attention in largely state- linked main stream media.
INDIA

India, with its thriving middle class and consumption driven economy, was
considered a model economy that has had phenomenal economic success with
its technology and software related exports. Through liberalization initiatives
and opening of the country for foreign investors, India had gained considerable
economic stability that was unthinkable just two decades ago. By encouraging
FDI flows and holding inflation under 6 percent, India’s annual average GDP
growth rate was just under 10 percent
FII’s pulled out Rs. 25000crore from equity / debit portfolios in a single month.
Unavailability of foreign funds such as ECB, thus forcing a shift to rupee
funds / loans worth Rs. 9000cr. The global credit crisis has led to a steep
appreciation of USD which spiralled up to INR 49.30 / USD.

CHINA

Among the BRIC group of countries, China had the most vibrant economy with
a GDP growth rate averaging over 10 percent, a large trade balance with the rest
of the world, and FDI flows averaging $250 billion for the past five years
(Table 2). Additionally, China had about $2 trillion in foreign exchange
reserves. But, the credit crisis that is engulfing the world has also affected this
once powerful economic behemoth. China’s economy is growing too fast.
Chinese banks have, raised billions of dollars from capital markets and this
would help then absorb any credit losses. So that china can face the credit crisis.