A MACRO VIEW OF GLOBAL FINANCE. INDRANIL DEB JANUARY 2013. INDEX. THE ACTORS IN THE ECOSYSTEM. THE GLOBAL FINANCIAL ECOSYSTEM/ INDIA. THE US SUB-PRIME CRISIS(2008)- HOW, WHAT?. THE “IMPOSSIBLE TRINITY(TRILEMNA)” OF GLOBAL FINANCE. THE FISCAL-MONETARY-TRADE TRIANGLE. ECONOMIC CYCLES.
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OF GLOBAL FINANCE
THE ACTORS IN THE ECOSYSTEM
THE GLOBAL FINANCIAL ECOSYSTEM/ INDIA
THE US SUB-PRIME CRISIS(2008)- HOW, WHAT?
THE “IMPOSSIBLE TRINITY(TRILEMNA)” OF GLOBAL FINANCE
THE FISCAL-MONETARY-TRADE TRIANGLE
A GLIMPSE OF THE LARGEST ECONOMIES
THE MAGNITUDE OF THEIR DEBT BURDENS, EURO-ZONE
BUSINESS ENITITIES – HOW THEY WORK, IMPACT THE SYSTEM
A FORECAST FOR 2013
the basic postulate is that money is the medium of exchange
The basic element of a financial system is 1 the individual(economic man).
An individual adult, typically, engages in economic activity of some kind, in order to earn her or his living. In the world that we live in, at the lowest level of an economic system, we typically have agriculturists or farmers, individuals who either work on their own plots of land or work in a farm as a hired hand. In the first case, poor of countries of the world normally have a large number of subsistence farming activity, that is, farms where the crop is sufficient to feed only the farmer and his immediate family members, leaving no surplus for the market. As the output from these farms are not exchanged for money, the value of their output, normally does not enter the computations of the financial system.
A large proportion of the population of the world also consists of labourers, both skilled as well as unskilled.
As the skill and education levels of individuals increase, they are paid better and higher wages and are engaged in higher-skill jobs, such as those of teachers, doctors, engineers, scientists, researchers, authors, musicians, etc. Whatever be their vocation, this composite group, comprising of men and women who form the basic element of the financial system, are known as “individuals”.
At the next level, there are 2“businesses”. These are non-personal entities and may be constituted either firms, companies, associations or bodies, depending on the laws of each individual country in which they operate.,
The third group is known as 3 “governments” and this could either be the local municipalities, the government of a state or province and a federal, national, union or central government of a country.
These three groups, broadly, are the eventual suppliers and users of money within a financial system.
The surpluses that these entities generate, namely, savings, profits and budget surpluses, respectively, in the case of individuals, businesses and governments is supplied into the financial system.
The Capital Markets are markets where suppliers and users of “equity” or “risk” capital transact. On the other hand, the “Money Markets” are markets for “debt” instruments or fixed-income instruments, that is, instruments that carry lower levels of risk, are normally secured against collateral and offer a fixed, low rate of return to the investor or lender.
At the apex of the monetary system of an economy is the 5 Central Bank of the country.
THE WORLD BANK &
THE CENTRAL BANK
THE CENTRAL BANK
THE RESERVE BANK
THE CENTRAL BANK
BANK FIXED DEPOSITS
SHARES AND DEBENTURES
UNITS OF UNIT TRUSTS
MUTUAL FUND UNITS
PROVIDENT, PENSION FUNDS
RENT/ CAPITAL GAINS
PRICE FOR GOODS & SERVICES
The stock of all debt and equity across the globe increased by 5% in 2010 to $212 trillion,
Half of the growth came from rising stockmarkets, which account for a quarter of all financial assets.
Global debt increased by 3% to $158 trillion, reaching 266% of GDP.
On-balance-sheet lending in China added $1.2 trillion to the debt stock, and its share of non-securitised loans now exceeds America's or Japan's.
China also led the way in initial public offerings, with 45% of the total.
Further fiscal deterioration in the rich world meant that global government debt increased to $41 trillion, equivalent to 69% of GDP among the 79 countries covered in the report.
MINISTRY OF FINANCE
FINMIN DIRECT SUPERVISION
RESERVE BANK OF INDIA
SECURITIES AND EXCHANGE BOARD OF INDIA
MONETARY POLICY, EXCHANGE RATE MANAGEMENT
CAPITAL MARKETS SUPERVISION
VENTURE CAPITAL FUNDS
STOCK BROKERS AND SUB-BROKERS
DEPOSITORIES & PARTICIPANTS
LOW INTEREST REGIME
EXCESSIVE HOUSING ASSETS
HUGE CREDIT EXPANSION
LOSS IN 2008
USD 500 BN+
LEHMAN BROS. USD 210 BN
BEAR STERNS USD 90 BN
MERRILL LYNCH USD 52 BN
AIG USD 41 BN
WAMU USD 15 BN
HUGE ASSET BUBBLE
The underlying assumptions for pricing the securities did not factor in a 20% fall in house prices
ALT A LOANS
FICO(Fair Isaac Corporation) Score Of less than 680
THE LEVERAGE MULTIPLIER-HOW IT WORKS
By borrowing $15 for
every $1 of capital-or
leveraging up 15 times-
an investment bank
could turn $10 billion into a portfolio of $150 billion
$ 3 bn loss
30% capital erosion
But leverage also
amplifies losses. When
the value of the bank’s
portfolio drops by 2%,
or $3 billion, 30% of the bank’s networth effectively gets wiped out; reducing the original capital of $10 billion to $7 billion
Those losses have
ramifications that go
beyond the bank. If its
remains the same, the bank may have to cut back its lending-in this case by $45 billion(3 billion x 15). That sudden tightening hurts the economy.
$ 45 bn cutback in loans
30% on gross portfolio
Sudden tightening/ squeeze hurts the economy
SOURCE: THE MINT(THE WALL STREET JOURNAL), OCTOBER 14,2008
The modeling of real exchange rate and of the current account determination has been, and
remains, one of the most enduring and challenging topics of research in open-economy macroeconomics.
However, until quite recently, the study of the two variables has proceeded on largely
separate tracks. For instance, the typical examination of the real exchange rate relies upon eitherinterest rate and purchasing power parity conditions
THE CENTRAL BANK
Error of optimism
PE expansion, Credit too easy, Long term investing, Ends in a sudden shock
Leading sectors fail, credit tightens. General profit environment okay, but PE falls
Boom spreads, widespread prosperity. Markets rise due to earnings
One sector takes off and then entire market follows. Sentiment improves as EPS rises
Money really tight. Fear demand and EPS starts falling
Easy credit, slack earnings
Easy credit to try and kick-start profits
in Bear Rallies
• Option Value
Role of Government
Pallet- 48” x 40”
CAN YOU DRIVE A 53’ LONG TRAILER-TRUCK?
AND NOW… LET’S GET A SENSE OF THE SIZE OF THE DEBT PILE…
The US Capitol Building, Washington D.C.
Length(North-South): 751.33 feet; Width: 350 feet; Height:288 feet
The Oriental Pearl Tower, Shanghai – 1,535 feet
Dai-Ichi Power Plant, Fukushima – 860 acres
Brandenberg Gate, BerlinLength: 213 feet; Height: 85 feet
The Eiffel Tower, Paris
Height: 1069 feet; Base: 328’ x 328‘
The Houses of Parliament, London
Area: 3.24 hectares(3,48,750 sq. ft.); Principal façade length: 873 feet;
Height(Victoria Tower): 323 feet
St. Basil’s Cathedral, Moscow
Area: ( sq. ft.); Principal façade length: feet;
Height(Tower): 187 feet
Sides of the Octagon: 180 feet(4 long sides);
Height(Dome): 115 feet Height(Minarets): 130 feet
Extract or grow base materials Eg, mining, farming
Converting raw-materials to finished goods
Eg, food, electronics, cars
Ports, Airports, Railway Stations, Hotels, Convention Centres, Hospitals
Creating a sustainable superior ROI
Buying and selling products
Eg, Wholesalers, Retailers, Exports, Importers
Pool premia receipts from many to meet claims from a few(accident-event, death, retirement)
Selling People’s time – Lawyers, Accountants, Doctors, Software Engineers, Telecom, Internet
Accept deposits from savers, lend money to borrowers (business and personal)
Role of Business
Globally, a fiercely competitive business environment has prevailed where companies, not wishing to be left out of the race to grow bigger within the shortest possible time, raised both equity and debt capital heavily to fund ambitious expansions, acquisitions and diversifications. It was all about maximising growth opportunities, and financing this was not an issue.
A sudden change in business environment have left equity investors with stuck investments, increase in debt and inventories of companies leading to tight liquidity.
GLOBAL FINANCIAL CRISIS(2008 and after)
■ Massive destruction of capital pool
■ Lack of confidence
■ Poor liquidity in banking system
GLOBAL ECONOMIC CRISIS
■ Recession in major economies
■ Lower growth in others
■ Lower consumption and demand
■ Lower Sales and Profits
■ Reduced cash flows
■ Lower Return on Capital Employed
■ Reduced Market Capitalisation
■ Lower Enterprise Valuation
1) Debt Reduction
3) Transferring wealth from haves to have-nots
4) Debt monetization
Monetary policy less effective. Where effective, such policy becomes preferred policy
Fall in economic activity and financial asset prices
Transfer of household debt to sovereign debt by monetary and fiscal stimulus- that leads to a recovery
Nominal interest rates brought down and currency devalued. Exports an important growth driver
Debt growth accelerates. Private sector savings go down
Typical debt/ income ratios decline as economic activity and financial asset prices improve.
Hong Kong, Singapore
South Korea & Taiwan
Canada/ Australia/ New Zealand
Brazil & Latin America
Printing of money/ monetization
3. The future of the EU
4. Global Currency Volatility
5. Commodities Prices Begin to Escalate
CHINA WILL CONTINUE TO RECEIVE HIGH FDIs
INFLOWS INTO INDIA COULD SLOW-DOWN UNTIL GENERAL ELECTIONS
THE US COULD WITNESS
LARGE FDI INFLOWS – STRONG REVIVAL OF ECONOMY
Russia, E Europe
JAPAN COULD INVEST HEAVILY IN MENA & USA
M & P – NEW MAGNETS
Middle East & North Africa
FDI INFLOWS INTO S.A. LIKELY TO BE RELATIVELY QUIET
FDI INFLOWS INTO MENA LIKELY TO INCREASE-MORE FOR RE-CHANELLING
Australia & New Zealand