Global Financial Meltdown

Reasons and Impact on US,

Canada, Greece and Dubai.

-By Jatinbhai Patel,

Aarti Balasubramanian.
Global Financial Crisis
 All previous financial crises were regional
/local crises
 In all previous financial crises the effects
could be contained
 The present financial crisis is the first truly
world crisis of financial markets / financial
capitalism
 It hits all the stock markets in the world / all
financial centres of the world (more or less at
the same time)?
 It hits all internationally operating banks
/financial concerns / institutional investors
The peculiar riddle of today’s world
financial crisis
It started in one relatively small segment
of the US – real estate and mortgage
market (the socalled “subprime” segment)
 and it ended up as a world financial crisis

affecting all international financial

markets and all capitalist countries in the
world
 How was this possible?
US Housing Bubble
US Housing Bubble created by
◦ Low interest rates
◦ Tax regulation of sub-prime mortgages with
adjustable rates, two year teaser rates
◦ Securitization of mortgages, sold to unwary
buyers as highly rated
US Bubble popped when
◦ Interest rates rose in 2006, housing prices fell
◦ Subprime mortgages and securities defaulted
Subprime and prime – the US-
housing market
Selling properties to the ninjas (no income, no
job, no assets)
 Teaser rates and other tricks – apparently very
low costs (at the beginning) – but renewal of the
loan due at variable conditions – variable
interest rates to begin with
 Credit default – no problem as long as the
bubble thrives
subprime mortgages – 160 billion $ in 2001 to
more than 600 billion $ in 2006
US Housing Market (ctd.)
simple mortgages – homeowners and
(local) banks
 the ever extending system of financial
intermediation
 an ever wider range of highly specialized
institutions
 mortgage finance, refinance (public
concerns like Fannie and Freddie) and
insurance
 the thriving secondary markets for the
mortgage based assets
The housing bubble – rising
mountains of debt
Bubble driven by rising house prices (at double
digit rate)
 House prices driven by increasing demand
 from prime to subprime – expansion of the market
 stagnant labour incomes – explosive growth of
private debt, but also – growth of pirvate wealth
(making money by selling a house / by refinancing
the mortgage based upon ever higher real estate /
house prices)
 the US consumption levels based upon rising
mountains of debt (with stagnant wages for the
large majority of workers)
The bubble bursts
 Credit defaults happen – first and foremost
in the subprime sector
 Rising interest rates – rising levels of
foreclosures - a faltering market (rapid
decline of new mortgages)
 More and more subprime mortgage loans
get foul
 Declining house prices make refinance ever
more difficult
 Credit rationing by the banks (flight from
mortgage finance)
The Financial Crisis: Canadian and US
Experience Compared

Canada/US Housing Prices 1999-2009

250

200

150
1999 = 100

Canada
US
100

50

0
99 00 01 02 03 04 05 06 07 08 09
19 20 20 20 20 20 20 20 20 20 20
Year
 0 Mortgage delinquencies: Canada/US

12.00%

10.00%

8.00%
Canada -arrears
6.00% US defaults
US 30 day arrears
4.00%

2.00%

0.00%
Se 5

Se 6

Se 7

Se 8

Se 9
M 5

M 6

M 7

M 8

09
-0

-0

-0

-0

-0
0

0
0

0
p-

p-

p-

p-

p-
ar

ar
ar

ar

ar
M
 Unemployment: Canada-US
Unemployment Rate (s.a.)
12
10
8
6
4
2
0
7
I Iii 8
I III 9
I III
0 0 07 0 0 08 0 0 0 9
2 20 2 20 2 2 0

Canada US
Greece’s Financial Problems
Since joining the euro, Greece has had
higher inflation than other Eurozone
members.
Greece has also increased debt faster than
others to finance generous public sector pay,
welfare, and retirement benefits, while
collecting a lower share in taxes due to
widespread tax evasion.
As a result, Greek goods have become
increasingly expensive and uncompetitive,
causing loss of market share and further
reducing revenues.
The Greek Debt Crisis
Greek debt/GDP ratio reached 113% and
deficit/GDP ratio reached 12.7% in 2009.
Foreign bondholders became doubtful that Greece
could continue to roll over its increasing debt,
forced interest rates higher.
EU faced choice between Greek default and bailout
with tough conditions.
IMF and EU agreed to lend Greece up to $146
billion over three years.
Greece to increase sales taxes, reduce public sector
salaries, pensions, eliminate bonuses.
Impact on Dubai
Dubai World, the state-owned holding
company whose bail-out plans triggered the
current crisis, has liabilities of about $60bn,
though only part of that is debt.
The property crash hit Dubai over a year
after Lehman Brothers crash - house prices
fell 50% in six months
Half of all the UAE's construction projects,
totalling $582bn (£400bn), have either been
put on hold or cancelled
Stock market plunged 70%
Thank You