Global meltdown – causes and

implications
 Major financial crisis

Mexican peso crisis

Asian crisis
International financial crisis
 Mexican

 It is the first serious international financial crisis.

 This crisis had a highly destabilizing and contagious effect on
the worlds financial system.
 Implications of Mexican crisis:
 It is essential to have a multinational safety net in place to
safeguard the world financial system from peso type crisis.
 Country should have saved more domestically and depended
more on long term rather than short term capital
investments.
 Asian crisis (1997-1998)

Decline of the Asian currencies substantially against

dollar.
Increased demand for Asian products replaced the
demand for products from other countries.
This crisis resulted in bailout of several countries by
IMF.
International financial crisis
 Causes for the global meltdown

Proximate causes:
 Subprime mortgage sector in USA
Fundamental causes:
 Large global imbalances
 Accommodative monetary policy
 Low interest rates.
 Relaxation of lending standards
 Financial innovations
 Signs of global meltdown

 Sustained rise in asset prices.

 Rise in mortgage credit to households.
 2004 – US federal reserve withdrew monetary
accommodation.
 Interest rates beginning to edge up – mortgage payments
raising.
 Loss by financial institutions and investors.
 Breakdown of trust among banks.
 Impact on capital flows

 Loose monetary policy and search for yield in the

advanced economies.
 Innovation in technology.
 capital flows:

Year Capital flows

1990 – 1996 US $ 124 billion
1997 – 2002 US $ 86 billion
2003 – 2007 US $ 285 billion
In 2007 US $ 617 billion
In 2009 US $ 190 billion
 Impact on Balance of Payments

 Deleveraging - Sell off in the domestic equity markets by

portfolio investors.
 Large capital outflows from the portfolio investors.

 Pressure on the foreign exchange market.

 Depletion of reserves.

 High inflation in food prices.

 Impact on real economy

 Growth in industrial production decelerated to 2.8% in

2008 – 2009 from 8.8% in 2007 – 2008.
 Services sector accelerated in 2008-09 so far with growth of
9.7 per cent (10.5 per cent in the corresponding period of
2007-08).
 GDP has slowed down to 6.9 % in 2008 – 2009 from 9% in
2007 – 2008.
 Growth of private final consumption expenditure
decelerated to 6.6 per cent from 8.3 per cent.
 Growth in government final consumption expenditure
accelerated to 13.3 per cent from 2.7 per cent.
 Effect on developed countries

 In Europe banks & FI’s adversely affected.

 Elevated level of commodity prices

 Sharp correction in a range of asset prices.

 Sharp slowdown in the growth momentum.

 Global growth for 2009 which was seen at healthy 3.8% in

April 2008 is now projected to contract by 1.3%.

 Effect on developing economies

 Global trade is expected to contract by 11% during 2009 as

against growth of 8.2% during 2006 – 2007.

 Private cash flows to EME’s fell from US $ 617 billion in

2007 to US $ 109 in 2008.

 Slowdown in external demand and the lack of external

financing have dampened growth prospects for EME’s.

 G20 – global meltdown

The G-20 on 15 November 2008.

 roadmap for future action to stabilize and reform
financial markets.
 Major focus was on strengthening transparency and
accountability.
 A commitment to free market principles.
 Reaffirm the development principles agreed at the 2002
Monterrey Conference.
 Investment in education and health
 DOHA – global meltdown

It adopted a voluminous Outcome Document

Highlights of this document are:
 the reconfirmation by and large of the Monterrey Consensus .

 the emphasis, especially at the insistence of developing countries.

 trade a strong focus on innovative financing approaches.

 an explicit focus on social investment.

 impact of the current financial and economic crisis on development.

 Commission of Experts on Reforms of the International Monetary

and Financial System.

Thank you