Background Briefs

Global economic crisis

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President Barack Obama has announced a major reform of banking regulation to prevent future financial crises. The overhaul will require big banks to put more money aside against future losses to curb excessive risk taking. Consumers will get a special agency to protect their interests and regulate mortgages and credit cards.

In outlining the reforms, President Obama described them as the biggest shake-up of the US system of financial regulation since the 1930s. The Federal Reserve will be given the authority to monitor major financial institutions.

The President said the lack of oversight among finance firms prompted systemic abuse causing risks for both companies and individuals. “We are working hard to build a new foundation for sustained economic growth. This will not be easy” he said. “We know that this recession is not a result of one failure but of many. And many of the toughest challenges we face are the product of a cascade of mistakes and missed opportunities which took place over a course of decades.”

Latest from the markets

GM demise

On June 1st, General Motors filed for bankruptcy protection, marking the biggest failure of an industrial company in American history. The widely expected move comes after GM had seen its losses widen following a steep fall in sales in recent years.

The move into bankruptcy protection has been backed by the federal government which is now expected to take a 60% stake in the company. The White House is also due to announce an extra $30 billion of aid for the Detroit automaker.

GM, which had already received $20 billion of federal aid since the end of last year, said in its bankruptcy filing that its current debts total $173 billion.

Chapter 11 bankruptcy protection gives a company time to restructure its finances while being protected from its creditors. The restructuring will drastically change GM, with some 20,000 U.S. workers thought likely to lose their jobs as the firm streamlines its operations. The firm currently has 173,000 employees across the U.S., Canada and Mexico.

GM’s European arm is likely to be spared bankruptcy following a proposed deal by Canadian car parts maker Magna International to buy GM Europe’s Vauxhall and Opel brands.

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More than 50,000 people work at GM plants throughout Europe. The World’s Laura Lynch has the story. (May 29th):

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It is expected that GM may be able to exit bankruptcy protection within 60 to 90 days. While the U.S. government is set to take a 60% stake in GM, the Canadian government is due to own 12.5%, with GM’s unions having 17.5%, and bondholders 10%.

Automakers across the world have been struggling to cope with a massive slump in demand for cars as consumers hold back on making expensive purchases.

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The European economy

The economies of the 16 countries that make up the eurozone declined by 2.5% in the first three months of 2009, the European Union’s statistics agency Eurostat said on May 15th. Analysts had forecast a drop of only 2%. A sharp fall in German exports was a key factor in the decline.

On May 7th, the European Central Bank (ECB) cut interest rates in the eurozone to a record low of 1%, down from 1.25%. The central bank also agreed a plan to pump about 60 billion euros ($80.6 billion) into the eurozone economy by buying up debt. The ECB’s American and British counterparts have taken similar unconventional monetary policy measures to boost growth. It was the seventh time the ECB has lowered its key rate since October 2008, when it stood at 4.25%.

America’s banks

Ten of America’s largest 19 banks need a combined $74.6 billion of extra funds to boost their cash reserves. That was the main finding on May 8th of the so-called “stress tests” to see if the banks have sufficient capital to cope should the recession worsen. Bank of America is the most at risk, needing an additional $33.9 billion.

Other banks that need more money include Wells Fargo, which is said to require $13.7 billion, and GMAC, the financial arm of General Motors, which needs $11.5 billion. Citigroup requires an additional $5.5 billion of funds, and Morgan Stanley has been told to find $1.8 billion. The 19 banks that were tested by Treasury Department and Federal Reserve officials account for two-thirds of the total assets of the American banking system, and more than half of the total amount of credit in the U.S. economy.

The U.S. economy continued to contract in the first quarter of 2009, led by the biggest fall in exports for 40 years. America’s GDP contracted at an annualized rate of 6.1% during the quarter, little improvement on the 6.3% fall in the last three months of 2008. Exports fell by 30%, the Commerce Department said, as the global recession hit worldwide spending.

All major exporting nations are being hit by the slowdown in world trade, which the IMF forecasts will contract by 11% this year. Exporters Japan and Germany are expected to suffer even bigger falls in GDP in 2009 than the United States.

Global downturn: BBC coverage

Global unemployment

Unemployment in the 16 countries using the euro as their currency increased in April to its highest level in nearly ten years, official data has shown. The unemployment rate in the eurozone rose to 9.2% from 8.9% in March, the highest rate since September 1999, the Eurostat data agency said. Unemployment in the wider 27-member European Union rose to 8.6% in April from 8.4% the previous month.

Despite seeing “tentative evidence” the U.S. recession is easing, the Federal Reserve in Washington warned in May that U.S. unemployment could reach 10%.

The global economy is set to decline by 1.3% in 2009, in the first global recession since World War II, the International Monetary Fund (IMF) predicted earlier this year. As late as January, the IMF had predicted world output would increase by 0.5% in 2009.

The IMF projects that the U.S will see its economy shrink by 2.8% in 2009, but other major economies are predicted to shrink even more, with Japan declining by 6.2%, Germany by 5.6%, Japan by 6.2%, Italy by 4.4%, and Britain by 4.1% in 2009.

The jobless rate in the United States is expected to average 8.9 % this year and climb to 10.1 % next year, the IMF said. The prospects for the advanced economies are not much brighter in 2010, with an overall forecast of zero growth.

G20 summit

President Barack Obama hailed the G20 summit earlier in April as a historic turning point in the pursuit of world economic recovery. Leaders pledged new spending and tougher financial regulations, in what the Mr Obama called an unprecedented set of actions to ease the crisis.

Speaking at a news conference in London, Mr Obama said that the G20 leaders had agreed “unprecedented steps to restore growth and prevent a crisis like this from happening again”. Leaders also agreed to introduce tougher financial regulations and sanctions against secretive tax havens.

BBC G20 summit coverage

Timeline: Global credit crunch

Trillion dollar deficit

On Feb 26th President Barack Obama unveiled a $3.6 trillion budget for 2010, aiming to pull the United States out of financial crisis. He has predicted the budget deficit for the current year will be $1.75 trillion, which is 12.3% of annual output and the biggest since World War II.

Planned spending includes $634 billion to pay for health care reform and an extra $250 billion to be set aside, in case it is needed to bail out U.S. banks. These announcements are an overview. There will be more details in April.

Video: President Obama on the budget

The crisis in graphics

On Feb 17th, President Barack Obama signed his hard-fought economic stimulus plan in Denver, after Congress approved the $787 billion package the week before. Speaking at a signing ceremony he said it was “the most sweeping recovery package in our history”. The plan is aimed at saving or creating 3.5 million jobs and boosting consumer spending and rebuilding infrastructure. Republicans say its tax cuts are insufficient, and that the economy will be saddled with debt for years to come.

On Feb 10th, Treasury Secretary Timothy Geithner unveiled a comprehensive $1.5 trillion bank bailout plan to beat the financial crisis. Under the plan, the size of a key Federal Reserve lending program will be expanded to $1 trillion from $200 billion. In addition, a public-private investment fund of $500 billion will be created to absorb banks’ toxic assets. “Right now critical parts of our financial system are damaged,” Geithner said. “Instead of catalyzing recovery, the financial system is working against recovery, and that’s the dangerous dynamic we need to change,” he added.

2008 was a difficult year for financial institutions, as they suffered billion-dollar losses and had to cut jobs, while some of them were taken over by the government or rivals. Seeking to stabilize the financial system, the federal government has bailed out Citigroup, Bear Stearns, Fannie Mae, Freddie Mac and American International Group and injected hundreds of billions of dollars into the financial system. Another of Goldman’s rivals, Lehman Brothers, went bankrupt in September.

Following the first wave of bank failures the House of Representatives adopted a far reaching financial rescue plan on October 3rd, 2008. The House vote was the second in a week, following its shock rejection of an earlier version on Sep 29th. The package is aimed at buying up the bad debts of failing institutions on Wall Street. The House adopted the new version after the Senate added about $100 billion in new tax breaks to win Republican votes.

Glossary of the credit crunch