The credit crisis which originated in the US in the wake of collapse of the Wall Street giants like Lehman Brothers and Washington Mutual has by now morphed into a full-fledged global financial crisis. The crisis, termed as the worst ever in the last 60 years after the World War II and also the Great Depression of the 1930s, is unprecedented not only in terms of scale (the extent of losses) but also penetration affecting both the developed as well as developing countries, worldwide.
On September 14, 2008, news of massive losses owing to sub-prime-related investments at two of the biggest investment banks in America shocked the Wall Street. The word ‘sub-prime’ was voted as the word of the year 2007 by the American Dialect Society. “Sub-prime means literally ‘less than ideal’ and is the technical term used to describe loans – especially mortgages – made to borrowers with poor credit histories.” The investment banks in question were Lehman Brothers and Merrill Lynch. That day, Lehman filed for bankruptcy while Merrill Lynch agreed to be acquired by Bank of America. The shocking revelations sent shivers down the spine of the American financial markets. Before the markets could understand the severity of the situation, another of the Wall Street icon, AIG, the world’s largest insurer disclosed that the Federal Reserve agreed to bail it out by injecting a mammoth $85 billion in emergency funding to prevent it from, what Reuters termed, a ‘disorderly failure.’
In less than a week’s time, the US Treasury Secretary, Henry Paulson, called for the government intervention in the form of liquidity injection worth billions of dollars to take the so-called toxic mortgage assets off the books of financial firms to restore stability. The very next day on September 20th the US President, George Bush sought the Congress’ mandate for $700 billion bailout package. The dramatic turn of events on the Wall Street had the entire global financial markets in a state of ‘shock and awe.’
However, until now what was largely viewed as a US phenomenon suddenly appeared to be a crisis of everyone; no one predicted this to spread to and engulf the entire global financial landscape. Towards the end of the September it became evident that it was no longer a problem of the US alone.
A fortnight later what happened on September 29 shocked the entire world. European Union faced its first ever banking crisis when ‘the European Central Bank along with the governments of the Netherlands, Belgium, and Luxemburg agreed to nationalize Fortis, the European banking and insurance giant.’3 The same day, Iceland, a tiny nation in Europe disclosed that it was nationalizing Glitnir, the third largest bank in the country. The next day, Ireland, another European nation, announced guarantees for deposits at six of its largest banks. The same day, Dexia, a Franco-Belgian bank announced that it would receive €6.4 billion in capital injection from the governments of France, Belgium, and the Luxembourg. The governments in these nations defended such moves saying that had it not for the bailout package, the bank would have collapsed thus causing ‘unacceptable system risk’ to their financial system.
Next to feel the heat was the Asian banking and financial sector as the reverberations of the crisis borne from the sub-prime meltdown had reached Asian shores as well. On October 10th, Yamato Life Insurance Co., a 98-year old insurer, filed for bankruptcy, signaling for the first time the ripple effect from the US sub-prime mortgage crisis reaching Japan and hence Asia. “A decline in the value of securities holdings widened losses at the Tokyo-based company, whose debts total 269.5 billion yen, as value of its investments widened amid the global market meltdown, Yamato Life said at a press briefing in Tokyo.”4 On October 19, South Korea announced a bailout package worth $130 billion to ease the credit crisis.
As financial sector firms from Japan to South Korea to China revealed billions of losses in troubled assets, increasingly it became clear that the credit crisis which originated in the US in the wake of collapse of the Wall Street giants like Lehman Brothers and Washington Mutual (it too filed for bankruptcy on September 28 in what is termed as the biggest bank failure in the US banking sector history) had by now morphed into a full-fledged global financial crisis.
The factors remained the same that had caused the US financial crisis – benign interest rate regime, booming housing and financial markets, surge in credit growth, which, in turn, were financed by foreign inflows into the banking sector. The crisis, termed as the worst ever in the last 60 years after the World War II and also the Great Depression of the 1930s, is unprecedented not only in terms of scale (the extent of losses) but also penetration (affecting both the developed as well as developing countries, worldwide). The “aggregate writedowns based on global holdings of US-originated and securitized mortgage, consumer, and corporate debt have risen to $1.4 trillion.”
Jany, Lead Economist
No comments:
Post a Comment