Project Report On Multinational business finance Submitted to : Prof.

K P Ramakrishnan Submitted by: Arash fruzi (8) Section: SF1

Topic:
Analyzing the reason for the beginning of the recessionary crises in the US and why such economic conditions migrated to Europe which is facing a similar situation today?

Contents
1. Definition..

.......
2.

History of recession......

3. Causes

.....
4. Types of

recession ..
5. Analysis of us

recession..
6. Impact of us recession in global

economy. 7. Europe Crisis ...

8.

The Euro Crisis.. ..

Definition:
Recession is a normal (albeit unpleasant) part of the business cycle; however, one-time crisis events can often trigger the onset of a recession. The global recession of 2008-2009 brought a great amount of attention to the risky investment strategies used by many large financial institutions, along with the truly global nature of the financial sytem. As a result of such a wide-spread global recession, the economies of virtually all the world's developed and developing nations suffered extreme set-backs and numerous government policies were implemented to help prevent a similar future financial crisis. A recession generally lasts from six to 18 months, and interest rates usually fall in during these months to stimulate the economy by offering cheap rates at which to borrow money.

History of recession:

United States Recession History The next recession confirmed occurred in the years between 1807 and 1814, and was called the Depression of 1807. This depression was primarily caused by the Embargo Act of 1807, signed into effect by then President Thomas Jefferson. This act destroyed a good part of the shipping related industries, and it was fought hard by the Federalists, who allowed smuggling to take effect in New England as a result of the Act. The Panic of 1819 soon followed. This was considered the first major financial crisis to unveil itself before the relatively new U.S. economy. This panic brought with it widespread foreclosures, failing banks, huge unemployment rates, and a gigantic slump in manufacturing and agriculture that caused havoc among Americans. This recession also marked the end of great economic expansion that had taken place following the War of 1812. Economic recessions in America continued with the Panic of 1837. This recession can really be attributed to failing banks, and to the lack of confidence people had in paper currency, which was becoming popular at the time. Banks stopped paying out in gold and silver, which really took its toll on American confidence. The Panic of 1857 followed not long after. With the failure of the Ohio Life Insurance and Trust Company (which at the time was one of the biggest in the United States) came the explosion of a European confidence bubble in the U.S. This greatly affected the railroads and U.S. banks, causing over 5,000 businesses in America to fail in the first year of the panic alone. Unemployment rose, and protest meetings became popular. Recessions continued to plague not only America, but the rest of the world as well. Considered part of the natural cycle of the modern economic system, no one can really escape recession in the long run. Countries like Germany, the U.K., China, and Japan have all had trouble with recessions. In fact, economists say that Germany is in for what might be the biggest recession in all of German history not too far down the road. Japanese economic recession has also played a huge part in their history. Japanese recession, just like economic recessions in America, can be linked to the dreadful cycle of imbalanced inflation, money supply, and interest rates that keep things in balance, rolling, and functioning properly. In the year 2001, the early 2000s recession hit America. The collapse of the dot.com bubble was truly the cause of these recessions, as well as the attacks that occurred on September 11th on the World Trade Center Towers in New York City. Accounting scandals also ran rampant, contributing to the overall downward

financial spiral that America faced. Everyone remembers the attacks on Americas soil, and nobody will forget how, despite economic trouble, the attacks brought Americans together, more united than ever. And with that kind of perseverance, America was led out of that struggle to a new future of prosperity. And lastly, America has been hit by what has been called the Late 2000s recession. The collapse of the housing market really set this one off on a bad note, and it, coupled with bank collapses in the U.S. and Europe, have caused consumer confidence and credit availability to plummet to new lows. Hopefully, things will turn around. But for now, the modern economic cycle again comes around to purge itself of the problems put on it by humanity, and unfortunately, that purge is known to us as recession

Causes of recession:
According to the National Bureau of Economic Research (NBER), recession is defined as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real gross domestic product (GDP), real income, employment, industrial production and wholesale-retail sales". More specifically, recession is defined as when businesses cease to expand, the GDP diminishes for two consecutive quarters, the rate of unemployment rises and housing prices decline. Many factors contribute to an economy's fall into a recession, but the major cause is inflation. Inflation refers to a general rise in the prices of goods and services over a period of time. The higher the rate of inflation, the smaller the percentage of goods and services that can be purchased with the same amount of money. Inflation can happen for reasons as varied as increased production costs, higher energy costs and national debt. (For more on this topic, see All About Inflation.) In an inflationary environment, people tend to cut out leisure spending, reduce overall spending and begin to save more. But as individuals and businesses curtail expenditures in an effort to trim costs, this causes GDP to decline. Unemployment rates rise because companies lay off workers to cut costs. It is these combined factors that cause the economy to fall into a recession

Types of recession:
Recessions can also be categorized. There are four types of recession that are referred to by analysts and they are as follows: V, W, U and L. The letters refer to pictorial representations that would be seen on a graph of activity and time. V Type

. The V recession is one where activity drops drastically, but quickly recovers, the left arm of the V being the drop, and the right arm, the recovery. While unpleasant, they are short-lived. Everybody on Wall street hoped that the current economic downturn would be a V type recession. W Type

The W recession is sometimes referred to as a double-dipped one, where there is a violent drop in economic activity, a strong and quick recovery and then another equally (or worse) drop but followed by a slightly slower recovery. U Type

. The U recession is what most analysts are saying we are currently experiencing, whereby there is a sharp drop which gradually gets worse, bottoms-out and then recovers quite dramatically, back up to the levels that it enjoyed before its descent. Therefore, market analysts who believe this think that the recession will be over at the end of 2010. L Type

. The L recession really describes a depression, characterized by a steep decline in economic activity, followed by a prolonged period, sometimes several years, of little or no growth. While it is easy to think of the Dow Jones Industrial Average (or S&P 500, or NASDAQ) as little more than reflections of what an economy is doing, they really arent as closely related as most people think.

A single stock price, and indeed an entire index (Dow Jones, S&P etc.) can be rising very quickly, while the economy itself is in sharp decline. Dont make the same mistake that so many other people make. Just keep in mind, that while unemployment continues to worsen, there can be NO economic recovery. For a country to truly prosper, among other things, it needs people in employment, supplying products and services to each other AND to other countries.luke

Analysis of US recession:
recession generally describes the reduction of a countrys gross domestic product (GDP) for at least two quarters. The usual dictionary definition is a period of reduced economic activity", a business cycle contraction. The United States-based National Bureau of Economic Research (NBER) defines economic recession as: "a significant decline in [the] economic activity spread across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales." Causes of recessions Currency crises Energy crisis War Under consumption Overproduction Currency crisis A currency crisis , which is also called a balance-of-payments crisis , 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 areal 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 countrys own currency reserves or its foreign reserves (usually in Euros, United States dollar or United Kingdom Pounds).Recessions attributed to currency crises include the 1997 Asian Financial Crisis and the Argentine economic crisis (1999-2002).1 Energy crisis An Energy crisis is any great bottleneck (or price rise) in the supply of energy resourcesto an economy. It usually refers to the shortage of oil and additionally to electricity or other natural resources. An energy crisis may be referred to as an oil crisis , petroleum crisis , Energy shortage , Electricity shortage or Electricity crisis .The 2008 Central Asia energy crisis is an ongoing energy shortage in Central Asia, which, combined with the severe weather of the 2007-08 winter (the coldest since 1969)and high prices for food and fuel, has caused considerable hardship for many. [ The abnormally cold weather has pushed demand up for electricity, exacerbating the crisis. The situation is most dire in Tajikistan. An international appeal has been made by the United Nations, NGOs, and the Red Cross and Red Crescent for around US$25 million to assist the government. The crisis has been ongoing and the UN has warned that millions face starvation during the 2008-09 winter. Causes Market failure is possible when monopoly manipulation of markets occurs. A crisis can develop due to industrial actions like union organized strikes and government embargoes. The cause may be over-consumption, ageing infrastructure, choke point disruption or bottlenecks at oil refineries and port facilities that restrict fuel supply. An emergency may emerge during unusually cold winters due to increased consumption of energy. Pipeline failures and other accidents may cause minor interruptions to energy supplies. A crisis could possibly emerge after infrastructure damage from severe weather. Attacks by terrorists or militia on important infrastructure are a possible problem for energy consumers, with a successful strike on a Middle East facility potentially causing global shortages. Political events, for example, when governments change due to

regime change, monarchy collapse, military occupation, and coup may disrupt oil and gas production and create shortages. Historical crises

Emerging shortages Kuwait's Al Burgan Oil Field, the world's second largest oil field, will be depleted within40 years. Crises that exist as of 2008 include: Oil price increases since 2003 - Caused by continued global increases in petroleum demand coupled with production stagnation, the falling value of theU.S. dollar, and a myriad of other secondary causes. 2008 Central Asia energy crisis, caused by abnormally cold temperatures and low water levels in an area dependent on hydroelectric power. Despite having significant hydrocarbon reserves, in February 2008 the President of Pakistan announced plans to tackle energy shortages that were reaching crisis stage. At the same time the South African President was appeasing fears of a prolonged electricity crisis in South Africa. South African electrical crisis. The South African crisis, which may last to 2012,lead to large price rises for platinum in February 2008 and reduced gold production. China experienced severe energy shortages towards the end of 2005 and again inearly 2008. During the latter crisis they suffered severe damage to power networks along with diesel and coal shortages. Supplies of electricity in Guangdong province, the manufacturing hub of China, are predicted to fall short by an estimated 10 GW. War War is the reciprocal and violent application of force between hostile political entities aimed at bringing about a desired political endstate via armed conflict. In his seminal work OnWar , Carl Von Clausewitz calls war the "continuation of political intercourse, carried on with other means." War is an interaction in which two or more militaries have struggle of wills. When qualified as a civil war, it is a dispute inherent to a given society, and its nature is in the conflict over modes of governance rather than sovereignty. War is not considered to be the same as occupation, murder, or genocide because of the reciprocal nature of the violent struggle, and the organized nature of the units involved.3

are is also a cultural entity, and its practice is not linked to any single type of political, to wars between city states ,ars may be prosecuted simultaneously in one or more different period of continuous conflict isar is not limited to the human species, as ants engage in massive inter-species conflicts , recessions and stagnation arise due to inadequate. The concept of under consumption had been. . However in the capitalist economy, , creates a dynamic whereby an abundance of commodities has Y. , some of the borrowers failed to pay back the all Street investment banks into securities (in technical jargoned and many other American goods and services become cheaper, US trade deficit may Attest Asia (like., President Bush has agreed to a $150billion compromise package which gives Get Quote Get Quote

Impact of US recession in global economy:

US has been the growth driver of world economy for a long time. If US goes into recession, all economies around the world will suffer. Some sectors in India will be affected more than other sectors. All companies/sectors which have direct US revenues will suffer more. IT will be hit the hardest as IT companies get most of their revenues from US. Demand/prices for commodities will also go down. This may include steel, copper, crude oil, gold. Companies producing/processing such commodities will also suffer. Companies that are more dependent on domestic consumption like Media, Cement (is a commodity but thrives on local demand) etc will be less affected.

The Europe Crisis:

he financial crisis has had a pervasive impact on the real economy of the EU, and this in turn led to adverse feedback effects on loan books, asset valuation sand credit supply. But some EU countries have been more vulnerable than others ,reflecting inter alia differences in current account positions, exposure to real-estate bubbles or the presence of a large financial centre. Not only actual economic activity has been affected by the crisis, also potential output (the level of output consistent with full utilisation of the available production factors labour, capital and technology)is likely to have been affected, and this has major implications for the longer-term growth outlook and the fiscal situation. Against this backdrop this chapter first takes stock of the transmission channels of the financial crisis onto actual economic activity (and back) and subsequently examines the impact on potential output. (stocks and housing in particular), saving increased and demand for consumer durables(notably cars) and residential investment plummeted. This was amplified by the inventory cycle, with involuntary stock building prompting further production cuts in manufacturing. All this had an adverse feedback effect on to financial markets. via global trade. World trade collapsed in the final quarter of 2008 as business investment and demand for consumer durables -- both strongly credit dependent and trade intensive had plummeted (Graph II.1.2). The trade squeeze was deeper than might be expected on the basis of historical relationships, possible due to the composition of the demand shock (mostly affecting trade intensive capital godsend consumer durables), the unavailability of trade finance and a faster impact of activity on trade as a result of globalisation and the prevalence of global supply chains.

The Euro Currency Crisis:

The financial crisis has breathed new life into hoary arguments about the demise of the euro. They invoke Milton Friedman, who warned in 1998 that Europe.s commitment to the euro would be tested in the first serious economic downturn. That serious downturn is upon us. Yet the results have been precisely the opposite of what Professor Friedman predicted.

Unemployment is now rising and with it populist posturing. In countries like Italy, already suffering from Chinese competition, and Spain, which is experiencing a massive housing bust, the pain will be excruciating. Yet these countries have shown no inclination to abandon the euro. They understand that even whispering the possibility would panic excitable investors. They see how countries like Denmark with their own currencies have been forced to raise interest rates to defend their exchange rates when the Fed and ECB are cutting rates. They see how, if there was still a lira or a peseta, they would be experiencing capital flight. They understand that they would have to fend off an old-fashioned currency crisis at the worst possible time. They appreciate that there is stability and security in numbers. And the euro-collapse scenario where such countries successfully pressure the ECB to inflate, compelling Germany to abandon the euro, has similarly shown no signs of developing. The ECB, protected by statutory independence and a price-stability mandate, has shown no inclination to let it rip whether in response to pressure from Mr. Sarkozy or anyone else. One can argue that the worst is yet to come . that there will be more inflation and unemployment down the road . and that, when they come, the euro area will collapse. Euro skeptics always make this argument. But, given recent events, it is now they who bear the burden of proof. What neither Professor Friedman nor anyone else anticipated in 1998 was that the first serious downturn following the advent of the euro would coincide with the mother of all financial crises. Runs by panicked investors have required central banks to undertake unprecedented lender-of-last operations. Extensive loan losses have required expensive bank recapitalization operations. There have been predictions that governments stretched to the limit by the financial crisis might respond by abandoning the euro. They might resort to the inflation tax to recapitalize their banks. They might inject the national currency to in the desperate effort to reliquify their banking systems and financial markets.

In fact, the response has been precisely the opposite. The ECB has provided essentially unlimited amounts of liquidity to euro area financial systems. And the Stability and Growth Pact has been relaxed to free up the borrowing capacity for governments to recapitalize their banks. 2 It is European countries outside the euro area, still with their own currencies, that have suffered the gravest difficulties. Because their currencies are not widely used internationally, many of their bank liabilities are in euros. They can.t print the euro liquidity that the banks desperately need. This renders them dependent on interest rate hikes to attract that euro liquidity via the market and on swap lines from the ECB. So far, those swaps have been forthcoming, but with delay and political baggage attached. The implication is clear. National banking systems need a lender of last resort. In small countries, where a significant share of bank liabilities is in someone else.s currency, the national central bank lacks this capacity. The only options are then to slap draconian controls on the banking system or join the euro area. Given the difficulty of rolling back the financial clock and the constraints of the Single Market, it is clear which way European countries will move. One already sees a shift in public opinion toward euro adoption in Denmark and Sweden. Poland has reiterated its commitment to adopting the euro. Hungary, given the trauma of an IMF program, is certain to do likewise. Obviously, the crisis will be economically and financial challenging for Eastern Europe. It will heighten the difficulty of meeting the convergence criteria for euro adoption. But it will also heighten the will to succeed. The implication, then, is a larger euro area, not a smaller one, as more countries see the writing on the wall. Indeed, there are already signs of countries not even in the EU, notably Iceland and Switzerland, contemplating EU accession as a step toward adopting the euro and resolving their financial dilemma. The one exception is probably Britain, whose currency is used internationally as a legacy of its history. In any case, Britain has always had one foot in Europe and one foot out. It is

conceivable therefore that Europe will have two currencies, the euro and sterling, in the long run. But three, much less three dozen, are out of the question.