01.09.2014 08:26

Mortgage crisis: Consequences

Just in 2013, the number of the unemployed in the world grew by 5 million people; and by the results of the same year, more than 200 million didn't have a job. More than five years after the mortgage crisis and 2008 economic crisis that it caused, global economy growth rate was still insufficient for provision of the needed jobs

Beginning of the global crisis
Chain reaction: EU
It was continued
China and India
Russia
Second wave
Results

In April of 2008, IMF estimated the losses incurred by financial organizations caused by the crisis in the USA as 1 billion dollars. One year following that number grew as much as in 4 times. In reality, the aggregate value of losses by the end of 2008 exceeded 7 trillion dollars.

Beginning of the global crisis

Starting November 2007, the most important stock market indexes began to decline, and for the following 11 months S&P 500 (the indicator of the aggregate capitalization of 500 largest American stock companies) dropped by 30%, MSCI World (the index that characterizes the global stock market condition) - by 32.3%, MSCI Emerging Markets (similar index for developing countries) - by 40.5%. While 2002 drop-down caused by the dot-com crisis affected mainly the USA, this time the consequences spread globally: the stocks of larger Western banks lost their value in the beginning, and starting from the middle of 2008, oil prices declined dramatically, which led to the fall of oil companies stocks of the third world countries. The beginning of 2008 was marked by a landmark fall in US markets: in particular, Dow Jones "fell" to 7882.51. Bankruptcy of American banks, mortgage and insurance companies led to liquidity crisis not only in the USA but also around the world. Banks stopped providing loans, including those for purchasing cars. That led to a significant reduction of sales volumes by global car manufacturers. As early as in October of 2008, three largest global companies - Opel,

Ford, and Daimler - substantially reduced their production, and, in 2009, General Motors declared bankruptcy.

Although by the beginning of 2008, an all-time high inflation rate was common, it was one year later that economists predicted deflation. At the beginning of the third quarter of 2010, important exchange currencies - dollar, yen, euro, and yuan - began the so-called currency war: countries intentionally reduced the value of their national currencies in order to obtain competitive advantages. Altogether, from 2007 to 2008, money flows reduced in 1.7 times.

Chain reaction: EU

The financial crisis that emerged forced the governments of the developed nations to provide financial assistance to their banks, and, as the result, increase taxes. That led to a decline in production and the following cutbacks in the economy of those countries. As fast as for the first three months of 2008, GDP of Denmark declined by 0.6%, that of Ireland - by 1.5%. In the following quarter, EU economy declined by 0.1%, that of Eurozone - by 0.2%. Only in May of 2008, the volumes of industrial production reduced almost by 2%. During the same period, the volume of European automobile sales declined by 7.8%, almost one third of it fell on Spain. The liquidity crisis resulted in the largest Spanish construction giants becoming bankrupts, and by July of 2008, prices for Spanish immovable property fell by 20%! The recession affected other largest EU countries: in June of the same year, the volume of German retail sales reduced almost by 1.5%. German economy itself reduced by 0.5% in the second quarter of 2008, Finnish - by 0.2%, Italian and French - by 0.3% each. The volumes of industrial production in Holland reduced by 6% in May of 2008. Several months later, Fortis, the large Dutch bank operating in partnership with Belgium, partially passed into state ownership. British GDP declined by 0.6% in the second to last quarter of "fatal" 2008, and by 1.5% in the last one. It was at that period that the United Kingdom's economy began to enter a recession. At the end of the year, the large outlet chain Woolworths declared its bankruptcy and closed. The similar situation developed in Eurozone: GDP that declined by 0.2% in the second quarter, continued its decline by the same 0.2% in the third one, which also signified economic recession.

The end of 2008 was marked by dismal events: EU volumes of industrial production reduced by 2.3% just in December as compared to the previous month, and by 11.5% as compared to December of 2007. Separately, the situation in Eurozone was even worse: by 2.6% and 12%, respectively. European Central Bank stuck to the policy of austere economy and reduction of government expenditures, thus generating credit deficiency. Moreover, such policy led to complication of access to loans on the part of borrowers, both to consumer and production loans. The situation was also complicated by the decision adopted at the EU ministers of economy, finance, and budget meeting in October of 2008. In accordance with this decision, countries were obliged to ensure their individuals refund of personal deposits in the amount of, not less than 50 thousand euro, which increased the volume of mandatory state reservation and contributed to the growth of liquidity crisis. Some countries went even further: Spanish governments increased minimal guarantees for bank deposits for private and legal entities up to 100 thousand.

It was continued

Of all EU countries, Greece suffered most of all. In order to pay the budget deficit, the country resorted to foreign borrowings and as early as at the beginning of 2010, the national debt amount reached a threatening limit. Not being able to cope with the debt settlement independently, Greece asked EU for a loan, and then Ireland and Portugal became EU debtors. A year later, Greece asked EU for assistance for the second time; its condition was catastrophic: the national debt amount was more than 140% of the country's annual GDP in summer of 2011. At the beginning of 2012, Eurozone countries adopted the program according to which Greece would receive 130 billion loan. However, one of the conditions for getting the loan was forgiveness of more than 53% of public debt under bonds by private creditors. Besides, Greece reduced minimum wage rate in the country in order to repay the loan. In October of 2008, the aggregate debt of four largest Iceland banks exceeded 106 billion dollars, while the national GDP was 14 billion. The government suspended exchange stock trade, Reykjavik OMX exchange branch was closed, short sales of all the country's bank stocks were banned. Prime Minister of Iceland, when making an address said that the country was on the verge of bankruptcy.

At the same time, Japanese Nikkei 225 fell to the minimum value for the previous 5 years, declining by 9.62%. Japan's Central Bank, which had previously allocated around 40 billion dollars for elimination of the crisis consequences was forced to increase the aid amount by 35.5 billion more. The largest national insurance company went bankrupt not being able to repay debt, aggregate amount of which reached 2.7 billion dollars. The national GDP dropped almost by 12% just for the last three months of 2008. The main reason was exports reduction; it especially effected automobile exports, which decreased more than by a quarter just by November of 2008. The national economy entered a recession. Australia spent around 4% of the annual GDP for making payments to foreign investors. By November of 2008, the national government devalued the national currency by 23% in order to overcome the crisis! Refinancing rate was reduced, and financial injections into the economy exceeded 7 billion dollars. A drop-down at stock exchanges that caused the fall of stocks and Australian companies led to significant losses incurred by the national pension funds. Further substantial reduction of international trade volume and fall of prices for raw materials caused the demand decline for Australian raw materials, proceeds from which constituted the main national budget item.

China and India

At the end of 2007, Chinese economy growth became slower: 11.2% in the fourth quarter against 11.5% in the third one. The volume of Chinese gold reserves reduced by 100 billion dollars by the beginning of 2009. In 2008, in the framework of anti-crisis program implementation, the government allocated the amount equivalent to 585 billion dollars - which was around 18% of the national annual GDP. Decline in demand at international markets led to closing Chinese enterprises focused on exports. Correspondingly, China began to buy less foreign raw materials, and that, in turn, led to the fall of their global prices. Just in the first quarter of 2009, the volumes of Chinese exports reduced more than by 30%! Although by April of the same year, state-owned enterprises reached pre-crisis production level, within the following year, beginning August 2011, Business Activity Index of the country's production sector remained depressed. The Indian government allocated around 5 billion dollars as aid for national exporters. The national central bank reduced the discount rate because of the same reason. A drop-down in automobile sales began in summer 2008, and in November of the same year, sales volume declined almost by 20%. Starting from the end of 2008, a reduction of industrial production volumes began as caused by the fall of Indian stocks and further capital drain by foreign investors.

Russia

Global liquidity crisis caused a dramatic fall of Russian market indexes and a decrease of export prices at the end of 2008. All that resulted in the reduction of industrial production and an economic recession. In January of the following year, its volume reduced almost by 20% as compared to the results of the previous month. The decline affected all types of economic activity, in particular, mineral deposits miming reduced by 3.6%, the volume of manufacturing - by 24.1%. Automobile production decreased almost by 80%, and construction material production volume reduced almost by 50%. Key indicators for certain types of chemical industry production decreased about by the same 50%. The volumes of iron-and-steel industry rolled products and steel pipes reduced more than by 34%. Anti-crisis measure expenses exceeded 3% of the annual national GDP. Attempts to prevent from a drop-down of ruble led to the decrease in gold and currency reserves almost by one quarter. Then the government initiated gradual devaluation process, which made production curtailment and withdrawal of funds to currency markets profitable. Nevertheless, by 2010, Russian stock market was leading by growth indicators, and economic losses turned out to be less than expected. As early as in the first quarter of the same year, GDP growth in Russia was 2.9%, growth of industrial production was 5.8%.

Second wave

Mortgage crisis caused the further global liquidity crisis. In addition to that, anti-crisis programs introduced by national governments and targeted at saving national economies led to the beginning of debt crisis. The first spin of recession in the Eurozone countries and in the United States ended by the end of the first semester of 2009. However, the second wave came two years later, and it lasted until 2014. By the results of 2011, Japanese GDP reduced again - for the third time, and investors switched to dollars and American bonds again, getting rid of euro and other countries' currencies. Just for the last week of September of the same year, Asian exchange platforms "sank" more than by 8%, European - by 4% in average, American - by 6.1%. Global losses exceeded 3.4 trillion dollars. Russian stock market fell to the level of the middle of 2010. A drop-down also occurred at all large global stock markets. The second wave of the crisis began. By the second semester of 2012, despite optimistic prognoses made by a number of economists, reports of five largest US banks showed the worst financial results for the period after 2008. Within the following 12 months, beginning July 2011 and for the first time after crisis years of 2007-2008, the aggregate global human welfare indicator decreased again; this time it fell by 5.2%. The global economy growth rate slowed down again, and some countries entered the recession phase again.

Despite Chinese GDP growth in 2012 by 7.8%, starting from the second quarter of the same year, Chinese PPI (producer price index) went down. The last 3 months of 2012 were marked by 0.1% GDP reduction for American economy and 0.6% - for Eurozone, and for the whole EU, the reduction was by 0.5%. German GDP alone reduced by 0.6% and French - by 0.3% because of the fall of export volumes. That negative dynamics was recognized at the worst for the period that began in the middle of 2009, when UE GDP fell by 1.7%. UE industrial production fell by 2.1% in 2012, that of Eurozone - by 2.4%. Although, in 2013, UE began to emerge from the crisis, the Cyprus's default in March of the same year postponed that process until the end of the year. However, economic recession in Eurozone ended in summer of 2013. Altogether, global GDP grew by 2.4% during that year.

Results

Although in 2014, in accordance with IMF prognoses, acceleration of United States as well UE and Japan's economies was expected, prognoses reversed to the negative side in June of the current year. Unfavorable weather conditions in the USA and the Ukrainian crisis were named as the most important reasons that caused that. It is notable that 2008 crisis had more serious effect rather on global stock markets than on American. In actuality, it means that the American "mortgage banquet" was mainly paid for by the rest of the world.

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