Global financial & economic crisis in 2011

The financial crisis in late 2000, sometimes referred to as the Credit Crunch or the Global Financial Crisis, is generally considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. The financial meltdown resulted in the collapse of super Financial institutions with power status, the bailout of mega-banks by the central governments, and plummeting stock markets around the world. However, in 2011, the world may be witnessing something which may be equally big, or maybe even bigger.  The WWII economic crisis and conditions are still extremely fragile. Probably turning short-term debt into long-term loans was the biggest trigger for this economic recession in 2011.

Some may call me to be somewhat more pessimistic in my outlook than is required, but here are my reasons to believe so.

  • The economy in US is in dire straits. The housing sector is yet to recover and high unemployment is troubling the super-power. The US is drowning in negative equity and job-less homes. Tax cuts may be short term evasive measure, medium and long term fiscal reforms may be necessary to pull US economy through this period. The recession in 2008-2009 is still making its presence felt in US, by depleting the reserves of the economic super-power. The tremble caused by BNP Paribas and Lehman Brothers is yet to subside full. Recently, US has been downgraded from its rating by Standard and Poor. The economists are suggesting long term reforms in banking,  such as raising capital ratios and switching from wholesale to retail funding, while filling in short-term gaps in capital. However, the banking industry would be subjected to a slow recovery in this track.
  • Japan has lost its AAA rating long back. The growth prospects for the once economic super-power is pretty poor.  Currently Japan’s national debt actually in excess of 200% of its GDP but its bond yields remain extremely low, since the growth prospects are not looking bright. As an effect of this, Japanese production has declined by over 15% in recent times.
  • The major debt that Greece is facing and the crisis thereof  not cured by the massive Eurozone and IMF bailout. The current bailout support may expire by 2013, and there has been no major financial restructuring in Greece. While the Greece government is sold out to Germany, this is even a bigger cause of concern because now the government will not even be able to print bills to increase inflation to depreciate its own assets. With the huge debt on Greece, the rest of EURO-Nations are equally strapped in the rear to come out with policy changes that may liberate them from this dire straits.
  • The crisis in the Irish national banking sector far from over. Even after receiving a staggering level of bailout assistance from the EU and IMF to cover the country’s insolvency, thanks to the Anglo Irish Bank and the other minor Irish banking institutions, the Dublin decision makers were forced to inject nearly $5 billion into Allied Irish Banks, another bankrupt institution. Ireland policy makers really need to figure out how to service this public debt, without triggering a shiver down its economy.
  • Europe in general is under severe economic stress. Without a major restructuring of debt, progress seems almost impossible. Debt burdens may continue to spiral upwards, and in several EURO using nations a debt write-down is very likely. German, French, and British banks hold most of the national debts, and a shiver there may trigger a collapse of the balance which apparently is resting on a spindle.
  • China, which seemed apparently less touched by the economic crisis in the west, is suddenly increasing its interest rates in an almost desperate effort to control price inflation. While China, the manufacturing super-power of recent times, strives to control the inflation within, this is almost an indicator of less attractive options to invest, outside the country, and even maybe within the country. Are we witnessing a scenario where the market demand has been saturated and the manufacturing sector is growing wary of the same?
  • India, which is evolving as an open market economy is not free from the crisis. Although Agriculture is still India’s most engaging “career”, most of the recent economic growth has been fueled from the services sector (IT, ITeS, Banking, or even tourism in few states). The welfare of these industries thrive heavily on the welfare of the counterparts in USA and to an extent in Europe, whose needs the service. The IT and ITeS alone has an average exposure of exceeding 52% to US markets and 34% to European markets, as per a report in Financial Times. On an average the services sector enjoy an exposure exceeding 82% to European and US markets. The meltdown of the economy in the western powers may be sufficient to trigger one in India.
  • With the advanced economies under such severe stress, emerging economies, may be slightly  insulated from major impacts, which can cause a huge eruption of their regular life. Worldbank says that the financial stress for the emergent economies may be over. However, since the development in these economies are heavily dependent on foreign direct investments from the economic super-powers, the development is likely to hit a stagnation. Is this an indication that the next financial tremble will arise from the developing economies?

Who knows how deep we actually are in this mess? Commodity prices are coming down, but that is probably the only brighter news in this downcast. Do let us know what you feel.

Author: Kar

Dr. Kar is in the Information Systems & Management area in one of the top QS Ranked universities of Asia/world. He has extensive experience in teaching, training, consultancy and research in Indian Institutes. He has published over 75 high impact research papers with hundreds of citations as per Google Scholar. He has also authored/edited a number of books. He is the Editor and Founder of Business Fundas. Note: The articles authored in this blog are his personal views and does not reflect that of his affiliations.