PANORAMA
10 years after global financial crisis shook the world economy
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It all started almost ten years ago with the bankruptcy of some major investment banks such as France's BNP Paribas and US-based Lehman Brothers, which led to the financial crisis, bringing the global economy on the brink of collapse. Countless people lost their jobs, households, businesses and governments saw their wealth evaporate.Ten years on, the global economy has seen a recovery and stock indices have hit new highs, but many countries have reported uneven growth. Here's a look at the past and the present:
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After almost a decade last year, the global economic growth showed a synchronous upswing. The world economy grew at 3.1% in 2017 and is expected to grow at the same pace this year, predicts the World Bank hinting that the shadow of the financial crisis is at last shaken off.Despite the positive short and medium term indicators, economists have pointed that the growth has been uneven, especially in the field of job creation.
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After falling sharply in the wake of the financial crisis, global trade as a percentage of output and overall growth has recovered, but it remains below its pre-crisis peak.
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The crisis revolved around the big investment banks. It arguably began with the default of hedge funds that invested in the secondary US mortgage market. French Bank BNP Paribas's step to suspend three similar funds exposed the US mortgage market crisis. The final nail in the coffin was when Lehman Brothers declared themselves bankrupt in September 2008.
Following which other major banks and corporations started failing. The interconnectivity of the world's financial system hugely affected banks globally. As a result, some banks restructured themselves while many closed down. After ten years, analysts say the financial crisis of 2007-09 highlighted the risk of concentration. But, the trend of larger banks and concentration of wealth is still intact.
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A BCG industry report on global banks and financial institutes says that even after 10 years since the financial crisis, the banking industry has not completely recovered. During the crisis, the six largest banks paid at least $110 billion in penalties related to the crisis. US banks shouldered most of those costs, though global institutions were also hit.
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According to the Institute of International Finance, global debt levels surged to a record-high of $233 trillion in the third quarter of 2017. Both private and public debt have surged over the past decade.The current levels of global debt-to-GDP ratio are a whole 12 percentage points higher than the previous peak of 2009 on the back of the global financial crisis.High debt makes government's financing vulnerable to sudden changes in market sentiment and limits its ability to provide support to the economy in case of crisis or downturn.
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During the worst phase of the crisis, World, US and Asia (excluding Japan) indices all fell by more than 40%, while the UK lost over 35% of its value.The worst affected were Japanese and European stock market indices, which lost more than half of their value, as measured by the MSCI Japan and the MSCI Europe (excluding UK) indices.With the world economy slowly recovering from the crisis, the Dow Jones Industrial Average has risen nearly four times since its 12-year low in March 2009.
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Despite worldwide recovery, there are some big worries.
- Across the globe, total factor productivity growth is projected to hover at around 1.2% through 2022. That is less than half of the 2.7% average growth in the years leading up to the global financial crisis.
- Similar to the decade back trend, top 10 commercial banks still account for more than half of the assets held by 100 largest commercial banks, making it risky in case of another downturn.
- S&P, Fitch and Moody's are still dominant players, earning more than $9 out of every $10 in the credit-rating industry.