Almost every country is scrambling to save their economies and livelihood as the world stares at the possibility of slipping into a recession, which is being dubbed by many as much worse and more severe than the Global Financial Crisis of 2008. But that was the kind of recession that countries fought head on.
What was the Global Financial Crisis of 2008 and how was it caused?
It was on September 15, 2018 when America's fourth largest investment bank, Lehman Brothers' giant Investment Bank went bust and filed for bankruptcy. The bank had total debt of $613 billion against total assets of $639 billion and 25,000 employees worldwide. The bankruptcy of Lehman is said to be the largest in the history surpassing the Worldcom’s and Enron’s.
This crisis let to the erosion of almost $10 trillion in market capitalization from global equity markets in October 2008.
In a podcast, Susan Lund of Mckinsey says that the epicenter of the global financial crisis was really the housing market. It started in the USA but it turned out that similar housing bubbles were building in other countries as well. The problem, according to him, started when housing prices stopped growing after some time and instead started declining. Then the economy fell into a recession and people lost their jobs.
This crisis pulled down the confidence in the banks across the world that included India’s then largest private lender ICICI Bank too. However, the USA was at the epicenter of this global economic crisis but impact of the crisis on India’s economy was minimal when compared to other countries.
The US government turned down the request of Lehman Brothers to bail out them as they were finding it little hard to roll over its borrowings in the markets. The Wall Street bank allowed it go bust. The failure of a systemically important financial institution with some $700 billion of liabilities sent shockwaves across the entire global financial system.
At that time, The Federal Reserve subsequently called it the worst financial crisis in global history.
Let us have a look at how countries across the world handled Global Financial Crisis of 2008.
U.S Federal Reserve began taking action and started slashing the interest rate. The interest rates were brought down to zero in 2008 from 5.25 per cent in 2007. However, this was not the only way to minimize the impact of recession. In February 2008, President George W Bush signed the Economic Stimulus into Law. The US President also approved the Troubled Asset Relief Program (TARP) in October 2008. TARP provided $700 billion in funds to purchase the assets of struggling company.
Germany in October 2008 promised to guarantee all private bank a/cs worth 568 billion euro and the government approved a plan to inject 500 billion Euros into credit market. The government also injected 10 billion euros taking a 25 per cent stake in country’s second largest lender.
French President Nicolas Sarkozy pledged 360 billion euros to banks and also hosted an emergency global financial crisis summit in Paris. Also the government announced it would inject 10.5 billion euros into the France's six largest banks.
Italy also went on the same path and provided 40 billion euros in T-bills to banks to refinance inferior assets. Foreign trade institute offered 100 million euros to make businessmen more competitive. Country hosted a meeting of G8 countries to discuss economic recovery.
The Asian economic power brought down the interest rates to nominal level to increase the liquidity in the market and the government also announced a slew of packages worth $16.7 billion and also injected $1.2 billion into regional banks and many more.
Finance Ministers P Chidambaram and planning commission deputy chairman Montek Singh Ahluwalia adopted three pronged strategy that ensured enough liquidity in market, no run on banks and no bank collapse resulting from asset liability mismatch. The day when Lehman collapsed, Indian government tried to insulate its Indian subsidiaries. The RBI almost halved the repo rate within six months of Lehman’s collapse. The government announced Rs 40000 crore stimulus packages and cut excise duties on products.
For in-depth, objective and more importantly balanced journalism, Click here to subscribe to Outlook Magazine