CREDIT CRUNCH (A Major Economic Crises) By: ASAD ALI SIYAL

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Presented by: Infants 2 Presented By: (Infants) Asad Ali Siyal Abdul Ahad Sarang Brohi Rajesh Dilpat

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Presented by: Infants 3

CREDIT CRUNCH:

CREDIT CRUNCH Credit crunch can be defined as : “A credit crunch (also known as a credit squeeze or credit crisis) is a reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates. In such situations, the relationship between credit availability and interest rates has implicitly changed, such that either credit becomes less available at any given official interest rate, or there ceases to be a clear relationship between interest rates and credit availability (i.e. credit rationing occurs )”. Presented by: Infants 4

Overview of Causes for Credit Crunch!:

Overview of Causes for Credit Crunch! A n exogenous change in monetary conditions (for example, where the central bank suddenly and unexpectedly raises reserve requirements or imposes new regulatory constraints on lending); the central government imposing direct credit controls on the banking system; or even an increased perception of risk regarding the solvency of other banks within the banking system Sustained period of careless and inappropriate lending which results in losses for lending institutions and investors in debt when the loans turn sour and the full extent of bad debts becomes known . Presented by: Infants 5

Overview of Causes for Credit Crunch!:

Overview of Causes for Credit Crunch! Reduction in the market prices of previously "overinflated" assets and refers to the financial crisis that results from the price collapse. This can result in widespread foreclosure or bankruptcy for those investors and entrepreneurs who came in late to the market, as the prices of previously inflated assets generally drop precipitously. In contrast, a liquidity crisis is triggered when an otherwise sound business finds itself temporarily incapable of accessing the bridge finance it needs to expand its business or smooth its cash flow payments. In this case, accessing additional credit lines and "trading through" the crisis can allow the business to navigate its way through the problem and ensure its continued solvency and viability. It is often difficult to know, in the midst of a crisis, whether distressed businesses are experiencing a crisis of solvency or a temporary liquidity crisis. Presented by: Infants 6

Categories of Credit Crunch :

Categories of Credit Crunch LIQUIDITY CRISIS FINANCIAL CRISIS Presented by: Infants 7

LIQUIDITY CRISIS:

LIQUIDITY CRISIS A liquidity crisis occurs when a business experiences a lack of cash required to grow the business, pay for day-to-day operations, or meet its debt obligations when they are due, causing it to default. When "liquidity crisis" is used to refer to an economy as a whole it means that liquidity crises affecting principal players in the economy are resulting in diminished availability of credit. Presented by: Infants 8

Types of Liquidity Crisis:

Types of Liquidity Crisis Liquidity Trap Non Payment of Interest Rates Loans Presented by: Infants 9

1. Liquidity Trap:

1. Liquidity Trap Situation where bank cash-holdings are rising and banks cannot find sufficient number of qualified borrowers even at extraordinary low rates of interest. It usually arises where people are not buying and firms are not borrowing ( for inventory or plant) and equipment because economic prospects look dim, investors are not investing because expected returns from investments are low, and/or a recession is beginning. People and businesses hold on to their cash and thus get trapped in a self-fulfilling prophecy. Presented by: Infants 10

Liquidity Trap Graph:

Liquidity Trap Graph Presented by: Infants 11 This graph shows that Loans are available at low interest rates but no one is ready to take.

2. Non Payment Of Interest Rates & Loan:

2. Non Payment Of Interest Rates & Loan An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. But the problem occurs when the lender don’t pays the amount of loan which is borrowed by him, neither the amount nor the interest, this leads the lender to face crisis. Presented by: Infants 12

FINANCIAL CRISIS:

FINANCIAL CRISIS The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. Mainly Financial Crisis is sub-categorized as follows: Stock market crashes Bank Panic Economical bubbles Currency crises Sovereign defaults Presented by: Infants 13

1. Stock Market Crashes :

1. Stock Market Crashes A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth . Stock market crash applies to steep double-digit percentage losses in a stock market index over a period of several days. Presented by: Infants 14 A Wall Street after the 1929 crash

Stock Market Crashes:

Stock Market Crashes Crashes are often distinguished from bear markets by panic selling and abrupt, dramatic price declines. Bear markets are periods of declining stock market prices that are measured in months or years. While crashes are often associated with bear markets, they do not necessarily go hand in hand. Presented by: Infants 15

2. Bank Panic:

2. Bank Panic A banking panic or bank panic is a financial crisis that occurs when many banks suffer runs at the same time. Bank Run can be defined as: A bank run (also known as a run on the bank) occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent . Presented by: Infants 16 A poster for the 1896 Broadway melodrama The War of Wealth depicts a typical 19th-century bank run in the U.S.

Bank Panic:

Bank Panic A systemic banking crisis is one where all or almost all of the banking capital in a country is wiped out. The resulting chain of bankruptcies can cause a long economic recession. Much of the Great Depression's economic damage was caused directly by bank runs Presented by: Infants 17

3. Economic Bubble:

3. Economic Bubble An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania or a balloon) is “trade in high volumes at prices that are considerably at variance with intrinsic values". It could also be described as a trade in products or assets with inflated values . Presented by: Infants 18 A card from the South Sea Bubble

Economic Bubble:

Economic Bubble Bubbles appear even without uncertainty, speculation, or bounded rationality. It has also been suggested that bubbles might ultimately be caused by processes of price coordination. Because it is often difficult to observe intrinsic values in real-life markets, bubbles are often conclusively identified only in retrospect, when a sudden drop in prices appears. Such a drop is known as a crash or a bubble burst. Both the boom and the bust phases of the bubble are examples of a positive feedback mechanism, in contrast to the negative feedback mechanism that determines the equilibrium price under normal market circumstances. Prices in an economic bubble can fluctuate erratically, and become impossible to predict from supply and demand alone. Presented by: Infants 19 A card from the South Sea Bubble

4. Currency Crisis:

4. Currency Crisis When a country that maintains a fixed exchange rate is suddenly forced to devalue its currency because of a speculative attack, this is called a currency crisis or balance of payments crisis. It occurs when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange or a store of value. It is a type of financial crisis and is often associated with a real economic crisis. Currency crises can be especially destructive to small open economies or bigger, but not sufficiently stable ones. Governments often take on the role of fending off such attacks by satisfying the excess demand for a given currency using the country's own currency reserves or its foreign reserves (usually in the United States dollar, Euro or Pound sterling). Currency crises are accompanied with speculative on the currency, and at the time of attack the currency is under the fixed exchange rate regime. Presented by: Infants 20 Recessions attributed to currency crises include the 1994 economic crisis in Mexico, 1997 Asian Financial Crisis, 1998 Russian financial crisis, and the Argentine economic crisis (1999-2002).

5. Sovereign Default:

5. Sovereign Default A sovereign default is a failure by the government of a sovereign state to pay back its debt in full. If potential lenders or bond purchasers begin to suspect that a government may fail to pay back its debt, they may demand a high interest rate in compensation for the risk of default. A dramatic rise in the interest rate faced by a government due to fear that it will fail to honor its debt is sometimes called a sovereign debt crisis. List of Major Sovereign Defaults . Latin American debt crisis (1980s) 1994 economic crisis in Mexico 1998 Russian financial crisis Argentine debt restructuring (2002) 2010 European sovereign debt crisis Presented by: Infants 21

Questions!!!:

Questions!!! Presented by: Infants 22

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Thanks! Presented by: Infants 23