+Assignment 2

International finance

Submitted to: Mam Sana Saleem

Submitted by: Wasim Cheema
Sap Id: 70057284
Semester: BBA 8th
LBS

University of Lahore (Chenab Campus)

Global Financial Crisis 2007

The global financial crisis refers to the period of extreme stress in global financial markets and
banking systems between mid-2007 and early 2009. During the GFC, a downturn in the US
housing market was a catalyst for a financial crisis that spread from the United States to the rest
of the world through linkages in the global financial system. Many banks around the world
incurred large losses and relied on government support to avoid bankruptcy. Millions of people
lost their jobs as the major advanced economies experienced their deepest recessions since the
Great Depression in the 1930s. Recovery from the crisis was also much slower than past
recessions that were not associated with a financial crisis. The 2007 financial crisis is the
breakdown of trust that occurred between banks the year before the 2008 financial crisis. It was
caused by the subprime mortgage crisis, which itself was caused by the unregulated use of
derivatives. This timeline includes the early warning signs, causes, and signs of breakdown. It
also recounts the steps taken by the U.S. Treasury and the Federal Reserve to prevent an
economic collapse. Despite these efforts, the financial crisis still led to the Great Recession.
The Great Recession was a period between December 2007 and June 2009 that saw the 2008
financial crisis, some of the worst unemployment rates, GDP, and economic disasters since
World War II. The Great Recession was brought on by several factors, mostly related to the faux
paws of the housing and banking industries - the subsequent effects of which devastated U.S. and
European economies. According to reports, real gross domestic product (GDP) fell some 4.3%
from a high in fourth-quarter 2007 to its low in second-quarter 2009 - and, to boot, the
unemployment rate skyrocketed from 5% in 2007 to 10% in October of 2009. While there were
many contributing factors to the Great Recession, much of it had to do with the "too big to fail"
mentality focused on large banking and housing institutions, as well as the growing housing
boom during the mid-2000s. And, the subprime mortgage crisis, brought on by the issuing of
risky housing mortgages, caused housing prices to plummet 30%, bringing the stock market
down with it (with the S&P 500 (falling 57% over two years).
Reason Behind
While there may be several causes of the Great Recession, some of the key reasons for the crisis
were due to the Federal Reserve's inability (or failure) of regulating the financial sector, the
financial institution's risky behavior (especially in regard to unadvisable mortgage lending), and
an exuberant amount of borrowing by consumers or corporations without regard to the financial
implications.
The Subprime Mortgage Crisis: The 'subprime mortgage crisis' was brought about by banks
and financial institutions issuing high-risk candidates mortgages they couldn't have afforded.
Subprime mortgages are typically mortgages granted to people with low credit scores (often in
the low or below 600s), which are high risk for the lender. During the mid-2000s, the housing
market was booming - one of the main reasons was that banks were giving mortgages to high-
risk candidates in order to fill up risky securities and bonds that they sold to investors in a pretty
package, calling them AAA-rated (low-risk) securities (which simply was inaccurate).
Additionally, securities called private-label mortgage-backed securities (PMBS) funded most of
the subprime mortgages.
Still, institutions invested in these risky bonds because of their misleading AAA ratings, causing
demand for housing to increase (due to how it was much easier to get a mortgage loan).
However, the housing bubble couldn't last forever - and soon home owners couldn't pay their
mortgages. Because refinancing or selling homes at the astronomically high prices wasn't a
viable option for paying off their mortgages, mortgage loss rates started skyrocketing for
investors and lenders alike. And, in April of 2007, one of the leading subprime mortgage lenders
New Century Financial Corp. filed for bankruptcy - and the bubble began to burst. More
subprime lenders began closing due to how the mortgage-backed securities were becoming rated
as higher-risk. Without those options, housing demand began to take a dive, and prices fell
drastically. And, within a short time, government-backed Fannie Mae and Freddie Mac suffered
enormous losses due to their outstanding loans allocated for mortgage-backed securities (which
they sold to investors as prime bundles). The federal government took them over in 2008, and the
number of home foreclosures and repossessions increased drastically.
The bust of the housing market, brought on by the subprime mortgage crisis, majorly impacted
the Great Recession, as it decreased construction, consumer spending, financial institutions'
operations, and investment and securities markets, according to reports. So, the subprime
mortgage crisis both collapsed the housing market, and created mistrust between banks (not
wanting to lend to each other), which majorly impacted the 2007 banking crisis and the Great
Recession overall.
Fed Interest Rates and Stimulus Package: While the stock market was actually reaching
market highs in 2007, with the Dow Jones Industrial Average (DOW) exceeding 14,000, by the
next year it lost more than half of its value due to the untenable stock market (resting at just
6,547) - costing thousands of Americans enormous amounts invested in the stock market.
American households and non-profits reportedly lost around $14 trillion in net worth.
To combat the drastic dip in investment and loans, the Fed reduced the national target interest
rate to zero percent for the first time ever (from around 5.25% in 2007). Additionally, President
George W. Bush introduced the Economic Stimulus Act, which, among many things, doled out
tax rebates, reduced taxes, provided businesses with incentives to invest capital, and increased
loan limits for those like Fannie Mae and Freddie Mac to encourage taking out loans and bolster
the economy. But, the package couldn't save the drowning economy, further progressing the
Great Recession.
"Too Big to Fail" Banks: Another major facet of the Great Recession was the "too big to fail"
modus operandi regarding the banking system. When major investment banking player Bear
Stearns called it quits after losing big on its investments in subprime mortgages, as well as assets
obtained through fellow banking giant JPMorgan Chase (JPM). Following in Stearns'
unfortunate footsteps, Lehman Brothers declared bankruptcy just a few months later, which was
reportedly the largest bankruptcy filing in U.S. history. Worried that this was becoming a pattern,
the Fed decided to lend AIG (AIG), an insurance and investment company, a hefty $85 billion to
keep it from closing its doors. But, the conundrum many faced was - were these companies "too
big to fail," or was the government propping up already-failing companies pointlessly?
Additionally, the Federal Deposit Insurance Corporation, or FDIC, took control of Washington
Mutual (AWSHX) - Get Report in 2008, which, at the time, was the largest savings and loan
following a 10-day bank run. In the same year, both Goldman Sachs (GS) and Morgan Stanley
(MS) converted from investment banks into bank holding companies in order to be more eligible
for bailing out.
Most Affected Countries
The crisis affected all countries in some ways, but certain countries were vastly affected more
than others. By measuring currency devaluation, equity market decline, and the rise in sovereign
bond spreads, a picture of financial devastation emerges. Since these three indicators show
financial weakness, taken together, they capture the impact of the crisis. The Carnegie
Endowment for International Peace reports in its International Economics Bulletin that Ukraine,
as well as Argentina and Jamaica, are the country’s most deeply affected by the crisis. Other
severely affected countries are Ireland, Russia, Mexico, Hungary, the Baltic states. By contrast,
China, Japan, Brazil, India, Iran, Peru and Australia are "among the least affected.

Argentina
Although affected by the world economic crisis of 2008-2009, the Argentine economy has
recovered since then, achieving GDP growth rates of about 9% in 2010 and 2011. However,
growth declined to an annual rate of 2.4% in the first half of 2012, while at the same time,
accelerating inflation has continued to be a source of concern. Argentina has benefited
considerably from its participation in the multilateral trading system, doubling its total exports
between 2005 and 2011, a factor which contributed to its rapid recovery from the crisis. Higher
international prices for its main exports have also contributed to the recovery.
Argentina makes active use of trade policy measures as an instrument to attain its long-term
goals, such as promoting overall economic growth or fostering industrialization, development or
self-sufficiency. In addition, Argentina also makes use of trade policy instruments to achieve
short-term objectives, such as containing inflation and maintaining balance-of-payments
equilibrium. For instance, Argentina has sought to dissociate the effects of fluctuations in
international prices of exports from its domestic market prices through domestic supply
agreements with producers, and by using export duties, which are one of the main sources of tax
revenue. It has also used mechanisms such as import licensing and compensation agreements
with producers to equilibrate its trade balance and promote domestic production. The use of trade
policy to achieve short-term objectives requires constant policy adjustments that add to the
complexity of the trade regime, making it less predictable. At the same time, it generates
additional costs for the economy.
The Argentine economy has recovered from the effects of the world crisis: while real GDP
growth did not exceed 0.9% in 2009, it picked up considerably in 2010 and 2011, reaching rates
of 9.2% and 8.9% respectively. This growth was driven in part by strong domestic demand, and
was largely due to Argentina's status as a major exporter of primary products. Argentina also
made active use of fiscal, monetary and income policies to stimulate its economy and overcome
the effects of the crisis. More recently, however, growth has slowed down as a result of a fall in
domestic and foreign demand. Although real GDP growth reached 5% in the first quarter of 2012
year-on-year, the economy stagnated in the second quarter; GDP growth for the first half of 2012
was 2.4% with respect to the same period in 2011. Argentina's public finances showed a surplus
during most of the review period, but they deteriorated in 2011 and 2012. Tax revenue as a share
of total revenue contracted from 19% of GDP in 2006 to 14.3% in 2011. This was compensated
in part by social security contributions, whose share doubled, largely as a result of the
nationalization of the pension system. Among the different taxes, the share of VAT and the
Income/Profits Tax (Impuesto a las Ganancias) grew during the period. The share of export
duties also grew, from 2.2% of GDP in 2006 to 2.9% in 2011, while import duties accounted for
0.8% of GDP in both those years. Export duties accounted for some 20.5% of total tax revenues
in 2011 up from 11.8% in 2006.
Argentina has a managed floating exchange rate system. Over the past few months, the peso has
appreciated in real terms against the dollar. The acceleration of inflation is a source of concern,
although it does not appear to be fully reflected in the official data, which takes into account only
variations in the consumer price index (CPI) of the Greater Buenos Aires area. While export
policy is seeking to stabilize the price of exportable products in the domestic market by applying
duties, the import policy that is being applied, by discouraging imports, could push up the price
of imported products, thereby affecting the level of inflation. Argentina has benefited
considerably from its participation in the world economy during the period under review, despite
implementing inward-looking policies that could have discouraged trade. Merchandise exports
reached some US$84 billion in 2011, almost twice the level reported for 2006. Agricultural
products and fuel exports accounted for approximately one third of total exports, with processed
agricultural goods (including meat) accounting for another third, and manufactured goods for the
remaining third. Argentina's export markets are relatively diversified: 56% of total exports in
2011 went to the seven main export destinations. Merchandise imports reached US$74 billion in
2011. The surplus on the trade balance has been declining over the past few years, mainly owing
to a deterioration of the oil balance, which posted a deficit of US$3 billion in 2011, 50% higher
than in 2010.
After peaking in 2009, the balance-of-payments current account surplus decreased considerably
in 2010 and 2011, reflecting not only a more rapid increase in imports of goods and services than
in exports, but also a sharp increase in the outflow of investment income. During the period
under review, the authorities continued to implement a debt reduction policy. The objectives of
this policy for 2012 included obtaining the necessary funds to service the debt maturing that year
that could not be covered by the expected primary surplus, and further reducing the burden of
future debt servicing in relation to projected government revenue. In this same context, the
National Government also adopted measures to reduce debt in the provinces. As a result of this
debt reduction policy, GDP growth, and a primary surplus in public finances during the period
under review, the share of public debt in GDP was reduced from over 60% in 2006 to 41.6% in
2011.
Most Affected Industries
Most economists now agree that the worst part of the recession is over, and we’re officially in
sluggish recovery mode. No one can say for sure when things will finally return to normal, but
enough time has passed that an analysis of the data from the downturn’s lowest point is possible.
For many industries, that point took place in 2009 and 2010. It was a brutal period for most
businesses, and many struggled simply to tread water. But others were hit hard, and they offer a
unique view into what consumers consider non-essential when times are tough.
1. Building Material and Supplies Dealers:
Sales % Change from 2009 to 2010: -3.28%
“We know that construction projects dipped during the recession, but Sageworks’ data also
indicates that tangential industries—like the lumber dealers they work with—also saw sales
decrease during both 2009 and 2010,” Bierman said. “If there are fewer construction projects in
progress, contractors would be buying fewer supplies.” This made the building material and
supplies dealers industry the hardest hit of the recession.
2. Home Furnishings Stores:
Sales % Change from 2009 to 2010: -3.27%
When one of the earners in a double income home has just been pink-slipped, certain planned
purchases get demoted to the back burner. For example, that luxurious new chandelier suddenly
seems much less necessary now that the family is down to one paycheck. This industry was also
affected by the downturn in construction projects. “Since fewer people were building homes
during the recession, the retailers that carried household decorations and goods likewise saw a
decrease in sales,” Bierman said.” This just shows that industries—even when they aren’t in the
same supply chain—do not operate in a vacuum. The construction lull hurt other industries.”
3. Lumber and Other Construction Materials Wholesalers:
Sales % Change from 2009 to 2010: -3.07%

This industry includes establishments that sell plywood and bricks, and wholesalers of roofing,
siding, and insulation materials. Like the cement and concrete product manufacturing industry,
this one is also dependent upon construction projects, and when those came to a grinding halt in
2009, the industry took a major hit. Bierman agrees that this industry’s dependence on ongoing
construction projects was the source of its decreased revenue in 2009 and 2010. “There was
obviously a lower demand for lumber and similar supplies when construction was down,” she
said.
Reference
https://www.cnbc.com/2012/06/01/Industries-Hit-Hardest-by-the-Recession.html
https://www.wto.org/english/tratop_e/tpr_e/s277_sum_e.pdf
https://www.scielo.br/scielo.php?script=sci_arttext&pid=S0101-31572020000100068
https://www.investopedia.com/articles/investing/111615/4-countries-recession-and-crisis-
2008.asp
https://www.stlouisfed.org/publications/regional-economist/october-2015/recovery-from-the-
great-recession-has-varied-around-the-world
https://www.sjsu.edu/faculty/watkins/globalrec.htm