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Case Title:

US Financial Crisis: Impact on Emerging Markets

Publication Year : 2010

Authors: D Arora and S Gollapalli

Industry: Banking, Insurance and Financial Services

Region:Global

Case Code: ECC0053IRC

Teaching Note: Not Available

Structured Assignment: Not Available





Abstract:
The US sub-prime mortgage crisis that first became evident in 2007 had snowballed into the US financial crisis in 2008, leaving the US financial sector in disarray and also impacting global financial markets and economies. The financial crisis caused significant changes in the structure and functioning of the US financial sector. Wall Street witnessed Lehman Brothers going bankrupt, Bear Sterns being sold at extremely low prices, while Goldman Sachs and Morgan Stanley opted to convert themselves into commercial banks. The US economy suffered acute credit and liquidity crunch across sectors, leaving many corporates vulnerable to takeovers and bankruptcy. In the last couple of decades the global financial markets witnessed national boundaries disintegrating and the whole world becoming one big financial market. Technological advances also played a role in this integration. The increasing interdependencies across the globe resulted in the US financial crisis reaching the shores of emerging and developing markets and having a pan global impact. Despite healthy economic indicators, market dependencies and inter-region trade ensured that the financial crisis did not remain limited to US and Western Europe. The crisis adversely impacted the economic expansion activities in emerging economies in Asia, Africa, Central and Eastern Europe and Latin America. Low confidence and risk aversion amongst investors resulted in capital flowing out of the emerging economies, leading to falling equity markets, reducing external financing options, which meant little or no financial innovation, and higher credit cost for corporates and consumers and stricter lending norms. Besides which, the effects of the crisis had been different between regions and between countries. While Asia suffered much on account of falling commodity prices, weakening currency and decreasing export demand, Central and Eastern Europe on the other hand were impacted due to a decrease in demand from Western Europe, high debt servicing charges, inflation and reducing private consumption. While the governments of the affected emerging markets and economies had taken several measures to mitigate the impact of the crisis, it remained to be seen whether these measures would be adequate and effective and these markets would be able to overcome the future challenges.

Pedagogical Objectives:

  • To the interdependency of financial markets.
  • To the US financial crisis 2008.
  • To the impact of the financial crisis on emerging and developing markets.
  • To the challenges ahead for the policymakers and government.

Keywords :  US financial crisis, Emerging markets, Financial markets, Global recession, Interdependency of global financial markets, Wall Street firms, Sub-prime crisis, IMF (international Monetary Fund), Developing economies, Globalisation, US investment banks, Emerging economies, Asian economies, Eastern and Central Europe economies

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