RECESSION

The Status Of The World Now…

Recession – Defined
 “A significant decline in the economic
activity spread across the country,
lasting more than a few months,
normally visible in real GDP growth, real
personal income, employment, industrial
production and wholesale-retail sales”
 The current crisis is an outcome of the
huge liquidity crunch
 Curse of advanced financial concepts
What Are Sub-Prime
Loans?
 In the US, borrowers are rated either as
‘Prime’ or as ‘Sub-Prime’
 Prime - Borrower with good credit rating
based on their track record.
 Sub-Prime – Sub-prime borrowers are
the set of borrowers whose ability to
repay is in doubt.
 Sub-Prime borrowers are charged with
high level of interest rates
 Right of ‘Foreclosure’
What Went Wrong?
 Till 2006 US Economy was rich with huge
cash flows and interest rates were very
cheap
 Same time the real estate sector was in
boom
 Banks encouraged Sub-Prime borrowers by
lending more money despite their bad
credit history
 Mid 2006 real estate slumped badly due to
increasing interest rates & excessive supply
 Borrowers were neither able to combat the
increases in payment nor sell their homes
as the prices were depreciating leading to
Mortgage Backed
Securities - MBS
 An asset-backed security whose cash
flows are backed by the principal and
interest payments of a set of mortgage
loans
 Transform relatively illiquid, individual
financial assets into liquid and tradable
capital market instruments.
 Allow mortgage originators to replenish
their funds, which can then be used for
additional origination activities.
Securitization - MBS
World’s Exposure To
Crisis
 The financial crisis has spread way beyond its
epicenter in the US and has engulfed most of
Western Europe
 United Kingdom
 Has lined up a $850-billion rescue plan -
May nationalize Royal Bank of Scotland
 Bank of England will infuse liquidity of $351
billion through loans
 The government will guarantee $439 billion
worth of short-and-medium term debt
 The total liabilities of Barclays of £1,300
billion (leverage ratio of over 60), surpass
Britain's GDP
World’s Exposure To
Crisis
 Belgium
 The government took partial control of the
struggling Fortis Bank - Fortis Bank's
liabilities are several times larger than the
GDP of Belgium
 France, Belgium and Luxembourg stumped
up $93 billion to recapitalize Dexia, a
French-Belgian lender that ran up huge
losses in its US operations
 Ireland
 Has guaranteed all bank deposits
World’s Exposure To
Crisis
 Iceland
 The government has nationalized three
of Iceland's biggest banks
 Accounts in these banks stand frozen

 Spain
 Will spend 50 billion euros ($68 billion)
to buy bank assets, almost a third of
the proposed 2009 central government
budget
World’s Exposure To
Crisis
 Germany
 Has guaranteed all bank deposits

 The total liabilities of Deutsche Bank

(leveraging ratio of over 50) amount to
2,000-billion euro, which is more than 80
per cent of the GDP of Germany
 Italy
 Unicredit Bank has announced plans to
raise its capital ratio by spinning of
property assets
 The International Monetary Fund (IMF)
revised upwards its projection of the losses of
Poor Show Of Indices
Change in
Index Aug-08 Mar-09 %
Dow Jones 11543.55 6594.44 -42.87
FTSE 100 5636.6 3529.86 -37.38
Sao Paulo 55680 37434 -32.77
CAC 40 4482.6 2569.63 -42.68
DAX
Shanghai 6422.3 3695.49 -42.46
Composite 2397.37 2221.08 -7.35
Hang Seng 21261.89 12064.23 -43.26
Nikkei 13072.87 7215.09 -44.81
Kospi 1474.24 1047.8 -28.93
RTS Index 1646.14 559.09 -66.04
Sensex 14564.53 8197.92 -43.71
More Woes..
 4,89,047 – Jobs been laid off since Nov 2008
 $300 Billion shelled out as bail-out packages

 Pink Slips Galore – “If America catches cold

India sneezes”
 Various stimulus packages across the globe
Estimated GDP Growth

Down
But
Not
Out

Estimated GDP
Growth Rate For
2009
What’s in store for us?
 Hope, Optimism & Change
 Sustainability – hang in there
 We are down but not out – World
economies will shrink
 Lower inflation / Lower interest rates will
support the broader economy
 2003-2007 ‘Go-Go’ years are over
 2009-????? ‘Go-Slow’ years begin
Liquidity Life Cycle
Thank You
Have a great recessed year
ahead…