Saturday, 7 August 2010

Narrabundah FC 3

Canberra Olympic 0

Scoring
Olympic Forfeit

On a glorious day in South Canberra, it was a fired up Narrabundah side that arrived at the ground to book their spot in the top 4 with a win over league cellar dwellers, Canberra Olympic. Unfortunately/fortunately, they didn’t bother coming and so Coach Romero put his chargers through their paces instead with a solid training session. Given there was no game to discuss, please enjoy the following explanation of the global financial crisis instead.

The world economy underwent a significant downturn starting in 2007, commonly referred to as the Global Financial Crisis or GFC. Much has been written about it but most analysts agree on the basics. Large savings in the developing nations in Asia (China in particular) found its way to the trade deficit developed countries, in particular to the US and its financial institutions. This provided over a long period the consumers and businesses in these countries, through their financial institutions, with relatively cheap capital for lending. This, over time, led to questionable but massive lending to domestic borrowers with poor credit ratings to buy real estate (sub-prime loans), seemingly on the assumption that property prices would continue to rise. These loans were ‘repackaged’ by financial institutions with other types of assets and on sold with a ‘AAA’ rating, thus effectively concealing from some sections of buyers the high risk of the repackaged assets.

As the borrowers began to default and the true nature of the risks rose to the surface, a large proportion of the repackaged assets lost significant values with the underlying asset (property) worth often less than the amounts borrowed. This set a chain reaction, leading to reappraisal of all forms of leveraged assets. This also led to massive losses to many financial institutions around the world and insolvency of several large US institutions. As the crisis spread internationally, many overseas entities (in Europe in particular) including financial institutions found they had significant exposure to sub-prime assets or exposure to other entities which did.

One of the major immediate impacts of this was the availability and cost of credit, as banks and financial institutions tried to cover their losses and reorganise their balance sheets, greatly reducing investment in all developed economies.

Soon the effect spread to the real economy through reduced consumption due to a loss of wealth. A major factor in this loss of wealth was through tumbling property prices/rents and share markets due to a loss of confidence and increased risk aversion. Loss of investment followed. Most developed countries including many in Asia went into deep recessions as a result.

To contain the worst impacts of the crisis, a concerted international effort saw recapitalisation of several large financial institutions, mainly in the US, taking the ‘toxic’ (sub-prime) assets off their books by the governments and central banks. This prevented a more serious form of ‘domino effect’ occurring when one institution falls over, causing other institutions from which it borrowed funds to become insolvent as the collapsing entity defaults on its debts.

At the same time, governments attempted to offset the impacts on the real economy with ‘stimulus packages’ and loose monetary policy, and succeeded to a certain degree. This however now appears to have sparked a new crisis as the governments of several countries, particularly those in southern Europe, appear to have over-extended themselves with fears that several of these countries could now default on their sovereign debt.

In Australia, a combination of stimulus measures, a strong budgetary position, continuing strong demand from China for minerals and good lending practices by local banks combined to prevent the worst effects of the crisis from reaching these shores. But despite this and the fact that Australia managed to avoid a technical recession, the downturn has had large impacts on the local economy and revenue.  

A summary of the key impacts to Australia is provided below:

  • Tightening of credit. Despite the big local banks not having a great deal of direct exposure to sub-prime loans, they are net borrowers. This means that a lot of the funds lent in the Australian market were effectively borrowed from overseas. As such, Australia to a large extent suffered the same tightening (and cost) of credit as the rest of the world.
  • Collapse in the local stock market. As international investors pulled out, local investors moved to safer assets and companies and analysts re-evaluated projected future revenue streams, the local ASX dropped from over 6,700 in October 2007 to just over 3,300 in February 2009, a drop of more than 50%.
  • Slashing of interest rates. As the economy began to turn down, the RBA moved quickly to cut the official cash rate. Rates were cut quickly from a high of 7.25% in August 2008 to a low of 3% in April 2009.
  • Two stage stimulus package. The smaller first package of $10.4 billion was rushed out in October 2008 as the worst of the financial crisis was coming to bear. A larger $47 billion stimulus package was later announced in February 2009.