The Beginning Of The Global Financial Crisis Finance Essay - Free Essay Example

The stock price plunge and the severe credit crunch we are watching today in the global financial markets are byproducts of the developments in the US six years ago. In late 2001, fears of global terror attacks after 9/11 shook an already struggling US economy, one that was just beginning to come out of the recession induced by the bursting of the dotcom bubble of late 1990s. In response, during 2001, the Federal Reserve, the US central bank, began cutting interest rates dramatically to encourage borrowing, which spurred both consumption and investment spending. As lower interest rates worked their way into the economy, the real estate market began to get itself into frenzy. The number of homes sold and the prices they sold for increased dramatically, beginning in 2002. At the time, the rate on a 30-year fixed rate mortgage was at the lowest levels seen in nearly 40 years. Subprime lending and similar mortgage originations in the US rose from less than 8 percent of all mortgages i n 2003, to over 20 percent in 2006. The crisis began with the bursting of the US housing bubble and high default rates on subprime and adjustable rate mortgages, beginning in approximately 2005-2006. For a number of years prior to that, declining lending standards, an increase in loan incentives such as easy initial terms, and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop in 2006-2007, in many parts of the US, refinancing became more difficult. Default and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and adjustable rate mortgage interest rates reset higher. Foreclosures accelerated in the United States in late 2006 and triggered a global financial crisis through 2007 and 2008. Initially the compa nies affected were those directly involved in home construction and mortgage lending. Financial institutions, which had engaged in the securitization of mortgages, fell prey subsequently. An Overview The initial  liquidity crisis  can in hindsight be seen to have resulted from the incipient  subprime mortgage crisis. One of the first victims outside the US was  Northern Rock, a major British bank.  The banks inability to borrow additional funds to pay off maturing debt obligations led to a bank run  in mid-September 2007. The highly  leveraged  nature of its business, unsupportable without fresh infusions of cash, led to its takeover by the British Government and provided an early indication of the troubles that would soon befall other banks and financial institutions. Excessive lending under loosened  underwriting  standards, which was a hallmark of the  United States housing bubble, resulted in a very large number of  subprime mortgages. These high-risk  loans  had been perceived to be mitigated by  securitization. Rather than  justifying  the risk, however, this strategy appeared to have had the effect of broadcasting and amplifying it in a  domino effect. The damage from these failing securitization schemes eventually cut across a large swath of the housing market and the housing business and led to the subprime mortgage crisis. The accelerating rate of  foreclosures  caused an ever greater number of homes to be dumped onto the market. This glut of homes decreased the value of other surrounding homes which themselves became subject to foreclosure or abandonment. The resulting spiral underlay a developing financial crisis. Initially the companies affected were those directly involved in home construction and mortgage lending such as Northern Rock and Countrywide Financial. Financial institutions which had en gaged in the  securitization of mortgages  such as  Bear Stearns, Indy Mac Bank, and Fannie Mae  and  Freddie Mac,  then fell prey. It then began to affect the general availability of credit to non-housing related businesses and to larger financial institutions not directly connected with mortgage lending. At the heart of many of these institutions portfolios were investments whose assets had been derived from bundled home mortgages. Exposure to these mortgage-backed securities, or to the  credit derivatives  used to insure them against failure, threatened an increasing number of firms such as  Lehman Brothers,  AIG,  Merrill Lynch, and  HBOS. Development of the global financial crisis The development of the global financial crisis is a result of a number of complicated and interrelated factors. Starting with the downturn of the housing bubble in the US economy, the fall in the financia l stability in the US, and the rising commodity prices, all of the factors, in one way or other, has initiated the crisis. As stated by the United Nation in its Conference on Trade and Development, and in its Trade and Development Report 2008, the major factors for the crisis are: 1. The bursting of the housing bubbles in the US and in other large economies. 2. The global fallout due to the financial crisis in the United States. 3. The Soaring commodity prices. 4. Increasingly restrictive monetary policies in a number of countries. 5. Stock market volatility. 1) The bursting of the housing bubble in the US With the start of the new millennium, American housing sector has been on the move. The housing sector in the U.S. was in a boom. A combination of low interest rates and large capital inflows from outside the U.S. created a surplus of loanable funds and easy credit for many years. Subprime borrowing also was a major contributor to an increase in home ownership rates and the demand for housing as the owners can easily borrow money to buy houses. The overall US home ownership rate increased from 64  percent in 1994 (about where it was since 1980) to a peak in 2004 with an all time high of 69.2  percent. This demand helped increase the housing prices and increased consumer spending. Between 1997 and 2006, US household debt as a percentage of income rose to 130% during 2007, versus 100% earlier in the decade people were spending more than their income. Overbuilding during the boom period eventually led to a surplus inventory of homes, causing home prices to decline beginning in the summer of 2006. With the assumption that housing prices would still continue to appreciate, many subprime borrowers obtain adjustable-rate mortgages (ARMs), after failing to pay. Once housing prices started depreciating moderately in many parts of the US, refinancing became more difficult. Some homeowners were unable to re-finance and began to de fault on loans as their loans reset to higher interest rates and payment amounts. An estimated 8.8 million homeowners have zero or negative equity as of March 2008, meaning their homes are worth less than their mortgage, nearly 10.8% of total homeowners. This provided an incentive to walk away from the home, despite the credit rating impact. Increasing foreclosure rates and unwillingness of many homeowners to sell their homes at reduced market prices have significantly increased the supply of housing inventory available. The sales of new homes dropped by 26.4% in 2007 compared to the previous year. Nearly four million unsold existing homes were for sale, including nearly 2.9 million that were vacant. This excess supply of home inventory placed significant downward pressure on prices. As prices declined, more homeowners were at risk of default and foreclosure. U.S. housing prices had fallen approximately by 18% from their 2006 peak by May 2008. Subprime lending and its market During the boom, the lenders were also willing to lend money to the risky borrowers. Subprime lending is the practice of making loans to borrowers who do not qualify for market interest rates owing to various risk factors, such as income level, size of the down payment made, credit history, and employment status. They were taking high risk, only in expectation of higher return. The value of U.S. subprime mortgages was estimated at $1.3 trillion as of March 2007, with over 7.5 million first-lien subprime mortgages outstanding. Approximately 16% of subprime loans with adjustable rate mortgages (ARM) were 90-days delinquent or in foreclosure proceedings as of October 2007, roughly triple the rate of 2005. By January 2008, the delinquency rate had risen to 21% and by May 2008 it was 25%. Subprime ARMs only represented 6.8% of the loans outstanding in the US, yet they represented 43% of the foreclosures which started during the third quarter of 2007. During 2007, nearly 1.3 million properties were subject to 2.2 million foreclosure filings, up 75% respectively from the previous year 2006. More homeowners continued to receive foreclosure notices, with one in every 519 households receiving a foreclosure filing in April 2008. The estimated value of subprime adjustable-rate mortgages (ARM), resetting at higher interest rates, is U.S. $400 billion for 2007 and $500 billion for 2008. Reset activity is expected to increase to a monthly peak in March 2008 of nearly $100 billion, before declining. Securitization practices Securitization is a structured finance process in which assets, receivables or financial instruments are acquired, classified into pools, and offered as collateral for third-party investment. There are many parties involved. Traditionally, banks lent money to homeowners for their mortgage and retain the risk of default, called credit risk. However, due to this financial innovation called securitization, the credit risk is passed onto other poten tial investors. The securities that the investors purchase are called mortgage backed securities (MBS) and collateralized debt obligations (CDO). In exchange for purchasing MBS or CDO and assuming credit risk, third-party investors receive a claim on the mortgage assets and related cash flows, which become collateral in the event of default. MBS and CDO asset valuation is complex and related fair value accounting is subject to wide interpretation. Rising mortgage delinquency rate had reduced demand for such assets, lowering the price. Banks and institutional investors had recognized substantial losses as they revalue their MBS downward. Several companies that borrowed money using MBS or CDO assets as collateral have faced margin calls. Major investment banks and other financial institutions had taken significant positions in credit-derivative transactions, some of which served as a form of credit default insurance. Due to the effects of the risks above, the financial health of investment banks had declined, potentially increasing the risk to their counterparties and creating further uncertainty in financial markets. As can be seen from the above details, a number of factors combined to initiate the financial crisis from this housing debacle. The boom resulted in confidence of the consumers in the housing sector. There was overbuilding of houses and building up of inventories. There were speculators investing in the housing sector. There was mortgage fraud. But as the mortgage rate had risen (due to the increasing demand) and people were unable to pay, there were defaults on mortgages. There was then refinancing of these mortgages, and securitization of the unpaid mortgages. But the continuous fall in the price of the house (due to less demand and excess supply) eventually surpassed all expectation. The value of the houses had gone down below the value of the mortgage. There was a big hole in the financial institutions which primarily engaged in sub-pr ime lending. All of it can be blamed to one simple act. People were consuming more than what they were earning. 2) The global fallout due to the financial crisis in US With increase in globalization, the world is now an inter-connected system. All the countries are connected in one way or another. So if one country is affected, then the other countries can also expect some consequences. Just like, if one component of a system is down, then the whole system will collapse. Exactly the same happened. With the turmoil in the American financial system, the other countries experienced volatility to some extent. The major impact was on the stock market. The international trade was also affected. But the main cause lies in the root that all the economies in the world are interconnected with one another. Especially the U.S. economy is linked with most of the major economies in the world. Any impact on U.S. economy will affect the world economy. 3) The Soaring commodity prices Com modity prices have been on the rise from the year 2000 onwards. This mainly is due to the spending power of the people. The standard of living has increased in most of the countries, leading to increased spending. People were consuming a lot. The economy was booming. With increase in output production, there was economic growth. More countries were prospering. But with the growth, there was added inflation in the world economy. With higher consuming and spending pattern, there is increase of money supply in the economy, inflating the inflation rate. In 2008, the rise in the price of the commodities was way too much. The price of oil reached a peak of $147 per barrel. The price of rice, wheat, corn, all went up many folds in the current year. Raw material cost also increased. Rise in inflation has been most in 2008. No wonder people all around the world have been struggling to live a good healthy life. Much of the income are being spent on consuming necessity products, leaving onl y a little portion (or none) of the income as savings. The financial crisis just hit at a time when people were struggling to survive with their normal salary. 4) Monetary policies Central banks are primarily concerned with managing monetary policies; they are less concerned with avoiding Asset Bubbles, such as the housing bubble and dot-com bubble. Central banks have generally chosen to react after such bubbles burst to minimize collateral impact on the economy, rather than trying to avoid the bubble itself. This is because identifying an asset bubble and determining the proper monetary policy to properly deflate it are a matter of debate among economists. A contributing factor to the rise in home prices was the lowering of interest rates earlier in the decade by the Federal Reserve, to diminish the blow of the collapse of the dot-com bubble and combat the risk of deflation. From 2000 to 2003, the Federal Reserve of U.S. lowered the federal funds rate target from 6.5% to 1 .0%. The central bank believed that interest rates could be lowered safely primarily because the rate of inflation was low and disregarded other important factors. The Federal Reserves inflation figures, however, were flawed. Richard W. Fisher, President and CEO of the Federal Reserve Bank of Dallas, stated that the Federal Reserves interest rate policy during this time period was misguided by this erroneously low inflation data, thus contributing to the housing bubble. So the policies persuaded by the central banks will be limited to the extent to which it is affected to impact the economy. 5) Stock market volatility The stock market has always been a volatile instrument. People react to speculations and react accordingly in the stock market. The market fluctuates with relevant information. There is a high degree of correlation between the market and other financial activities around. So with any sort of negative environment looming around, the market can be expected to be ne gatively affected. The volatility of the market can only be blamed. All these factors led to the birth of the global financial crisis. It started from the US and spread across most of the major world economies. Bailout of the financial system As a response to the financial crisis which has affected the whole worlds economy, the US government decided to implement the Bailout of the financial system. On 17 September 2008, Federal Reserve Chairman Ben Bernanke advised Secretary of the Treasury, Hank Paulson, that a large amount of public money would be needed in order to stabilize the financial system. On 19 September 2008, the U.S. government announced a plan to purchase large amounts of illiquid, risky mortgage-backed securities from financial institutions, which is estimated to involve at a minimum of $700 billion of additional commitments. This plan also included a ban on short-selling of financial stocks. However, the plan was vetoed by the US congress because some member s rejected the idea that the taxpayers money is used to bail out the Wall Streets investment bankers. The stock market plunged as a result; the US congress amended the bailout plan and finally passed the legislation. Unfortunately, the market sentiment continuously deteriorated and the global financial system almost collapsed. While the market turned extremely pessimistic, the British government launched a 500 billion pounds bailout plan aimed to injecting capital into the financial system. The British government nationalized most of the financial institutions in trouble. Many European governments followed as well as the US government. What is this Bailout process intended to do? ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Improve liquidity: Through the money that has been injected into the economy by the purchase of stocks of the financial institutions, the government has intended to make those institutions recover from the existing crisis. The added cash has helped these financial inst itutions improve their liquidity since they are now more capable of paying off their debt. ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Investor confidence: The worst hit institutions from the financial crisis included firms like Fannie Mae and Freddie Mac, Lehman Brothers, and, more recently, American International Group. These companies saw their access to liquidity and capital markets increasingly impaired and their stock prices drop sharply. Due to the bailout process several firms will have improved liquidity and since the U.S. government will have some authority over these firms, investors will have more confidence than before. This will certainly cease the bearish trends noticed in the shares of these institutions. ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¢ Avoid Recession: The bailout process will have the same effect as an expansionary fiscal policy. The financial crisis has made a serious dent in the consumer confidence and unless the bailout takes place, this loss of consumer confidence would inevitably lead to a severe recession. Immediate market reactions When news of the bailout proposal emerged on September 19, 2008, the U.S. stock markets rose by approximately 3%. Foreign currencies corrected slightly after having dropped earlier in the month and the foreign stock markets also regenerated. The value of the  U.S. dollar  dropped compared to other world currencies after the plan was announced. The futures contract of oil spiked more than $25 a barrel during the day Monday September 22, ending the day up over $16. This was a record for the biggest one-day gain. Mortgage rates increased following the news of the bailout plan. Before the plan was announced, the 30-year  fixed-rate mortgage  averaged 5.78% in the week and for the week ending September 25, the average rate was 6.09%,  still far below the average rate during the  early 1990s recession, when it topped 9.0%. Impact on the financial institutions The f irst major impact in the US financial system can be highlighted as the collapse of Bear Stearns in March 17, this year. Prior to this year, there have been downfall in the financial market, but majority of those downfall were due to bankruptcy of the sub-prime lending institutions. The rise and the burst of the housing bubble made sure that the sub-prime lenders and other lending institutions, that took a high degree of risk, were out of business. The fall of these institutions did reflect in the stock market, but the effect was not countable. There was no major downfall in the stock market in the previous year. However, things started to change with the beginning of this year. With the cracks in the financial system, there was clear evidence of a financial meltdown, at the beginning of the year. Stock markets were showing a higher degree of volatility, the first of which was observed on the 21st of January. On March 17th, the investment bank Bear Stearns collapsed; its stock pri ce fell from $154 to $3! JP Morgan Chase, with agreement from US government, took over the soaring company. US government earlier injected $30 billion to prevent a default by Bear Stearns, but that did not help much. IndyMac Bank, the largest mortgage lender in the US, also collapsed on July. Till the beginning of September of 2008, the financial system was able to withstand the inner cracks in its system. However, on September 7th, Fannie Mae and Freddie Mac was rescued by the US Treasury; $200 billion was injected into the financially stricken mortgage giant. On September 15th, the largest investment bank in America, Lehman Brothers filed for bankruptcy. Simultaneously, Merrill Lynch was bought by the Bank of America. There was simply lack of liquidity to meet the customers deposit withdrawal, as these large banks lost heavily from the real-estate mortgage saga. This chain of action not only crashed the whole financial system in the country, but also initiated the downtrend in other countries also. In America the stock market plunged deeply with the fall of the two giants. The largest insurance company in the world, American Insurance Group (AIG), saw its share plunge 70%. On September 17th, the US Federal Reserve rescued AIG by injecting $85 billion, and becoming 79.9% stockholder in the company. The two remaining investment banks, Morgan Stanley and Goldman Sachs, saw their share price rocket down by 24% and 14% respectively. With the pressure of sustaining in the market, both the companies shifted to Holding companies in September 21st. The biggest bank failure in history occurred on September 25th when JP Morgan Chase agreed to purchase the banking assets of Washington Mutual. It is not tough to predict the impact on stock market. With so many large corporations failing one after another, the people of America lost their confidence in the security market. Dow-Jones, NYSE, all other indexes were in downward trends. The fall in the indexes was the highest for a good number of years. The whole of the securities market crashed, as the investors tried to take out their money from the market. All around the world the stock market tumbled. European and Asian stock market plunged between 3% and 5%. In Europe, the Paris CAC 40 index was down 4.32%, London had shed 3.47%, Frankfurt revealed a loss of 3.35% and Madrid dropped 3.18%. The British and the US stock markets had struck the lowest levels for about two years. In Asia, Taiwans stock was down 4.09% and Philippine shares were 4.2% down. Sydney was down 1.8%. Singapore closed down 3.27% and Indian shares tumbled 5.19%. These impacts were a mere reflection of the fact that the world is inter-connected; there is globalization in the world economy. The fall in stock market continued in most of the countries in the following days. As the financial system of the US crashed, other developed countries focused on their economy; especially in their banking sector. With the $700 bil lion bail-out plan in USA taking place, other major developed countries also went for the same strategy. There was now crisis in European banks! The biggest bank in Iceland, Kaupthing filed for bankruptcy; Government took its control. Soon Iceland had to nationalize the 2nd largest bank, LandsBanki, as well as the 3rd largest bank, Glitnir; all within the 1st week of October. Following the debt crisis in Iceland, most of the European banks were under pressure from depositors who were trying to withdraw their money. On the 6th of October, FTSE 100 recorded its biggest ever one-day point fall; it ended 391.1 points lower, down 7.8%. There was further drop in the 10th of October. None of the blue chip stock ended in positive territory. Banks were the biggest losers. The German stock market also experienced the highest fall, owing to the fact that the German banks had investment in the US deregulated banks. In Asian market, the same scenario can be seen. Tokyo suffered the biggest drop in two decades with insurance company going bankrupt as the first casualty. It suffered the biggest daily drop for two decades. The Nikkei was down 9.6% on the 10th of October. Toyota announced fall in sales and Sony announced fall in expected profit the following day; Nikkei went even further down, below 8000 points, for the first time in 22 years. The entire Asian markets plunged as the investors kept on dumping the shares. There was further impact on the European market following the Asian plunge. Londons FTSE 100 index nosedived 10.20 percent to as low as 3,873.99 points, the first time below 4000 points in 6 years. There was more than 10% fall in Frankfurt and Paris. The Dow Jones index plunged 7.33%, closing below 9000 points for the first time, since 2003. There was $68 billion rescue plan by Berlin; and other EU countries followed the pattern. Britain rushed out a package worth  £500 billion to head off a banking collapse. All the money injected to improve the financial instability and gain the confidence of the investors. European governments also started to give guarantee on the public savings, up to the total amount even. Lending between banks has almost dried up. Major central banks in the Europe slashed interest rates assist in solving liquidity crisis. The measures taken by the EU countries seemed to work out in the short run as stock market recovered gradually. Bank of Japan injected $50 billion (approximately) in their banking sector. Other countries in the Asian zone went for guarantying savings and deposits. The Asian market also gained in the following days. Future scenarios The economic downturn which began in 2007 and will continue through 2009 is expected by many analysts to be amongst the most severe in the past 100 years. While the scale of the downturn remains uncertain, the full impact on the real economy has not yet been felt and more bad news is still to come. Although a global rebound is expected in 2010, eve n emerging economies have proven considerably more vulnerable than previously believed, demonstrating the integrated nature of global financial and credit markets. Real GDP growth in more advanced markets such as the USA or UK is projected to rebound from 2009 and stabilize by 2012. Meanwhile, the longer-term trend in key developing markets such as China or India will be a gradual slowdown in growth over the same period. Inflation forecasts are clouded with uncertainty and commodity prices especially those of oil will play a key role in determining the growth outlook for most countries. Regulation in the financial and banking markets is likely to be overhauled in order to prevent a similar crisis reoccurring in the future. Government intervention is set to dramatically alter the banking and financial landscape, at least in the medium-term, and prompt ongoing volatility and uncertainty amongst businesses and consumers worldwide. The financial crisis and the developing worl d For the developing world, the rises in food prices as well as the knock-on effects from the financial instability and uncertainty in industrialized nations are having a compounding effect. High fuel prices, soaring commodity prices together with fears of global recession are worrying many developing country analysts. Summarizing a United Nations Conference on Trade and Development report, the Third World Network notes the impacts the crisis could have around the world, especially on developing countries that are dependent on commodities for import or export: Uncertainty and instability in international financial, currency and commodity markets, coupled with doubts about the direction of monetary policy in some major developed countries, are contributing to a gloomy outlook for the world economy and could present considerable risks for the developing world, the UN Conference on Trade and Development (UNCTAD) said Thursday.ÃÆ' ¢Ãƒ ¢Ã¢â‚¬Å¡Ã‚ ¬Ãƒâ€šÃ‚ ¦ Commodity-dependent e conomies are exposed to considerable external shocks stemming from price booms and busts in international commodity markets Market liberalization and privatization in the commodity sector have not resulted in greater stability of international commodity prices. There is widespread dissatisfaction with the outcomes of unregulated financial and commodity markets, which fail to transmit reliable price signals for commodity producers. In recent years, the global economic policy environment seems to have become more favorable to fresh thinking about the need for multilateral actions against the negative impacts of large commodity price fluctuations on development and macroeconomic stability in the world economy. Financial Crisis Likely impact on Bangladesh Bangladeshs economy relies heavily on garment exports. This is where the main risk of global financial turmoil lies. The financial sector especially the stock market is less prone to the global financial crisis because of its l ack of link with the global financial system. According to most scholars, Bangladesh is relatively insulated from the financial side, but vulnerable to potential global economic slowdown, particularly in the US and EU. The foreign exchange reserves of Bangladesh Bank and commercial banks have limited exposure to the securities markets and banking system risk in the US and EU. Foreign capital flows are largely in the form of concessional official lending. FDI and foreign portfolio investments are small. However, Bangladeshs economy relies heavily on garment exports. This is where the main risk lies. Remittances may also be vulnerable. On the positive side, import payments may be favorably affected as a result of declining commodity prices, particularly oil and food. The export sector is potentially the most vulnerable in Bangladesh since it depends heavily on US and EU economies. The readymade garment (RMG) industry accounts for over three quarters of export earnings and dep ends almost entirely on US and EU markets. There is growing concern that a deep and prolonged recession in the US and EU may reduce consumer spending significantly across the board, thus undermining the demand for Bangladeshi exports. BGMEA and BKMEA have indicated that growth in export orders was slow in the first quarter of Fy08. IMF has projected that income growth in Bangladeshs export markets will decline from 1.5 percent in 2008 to 0.5 percent in 2009. If this happens, consumer spending will decline. Although demand for Bangladeshs exports is not too sensitive to income, export prices may decline and this could have significant effects on our export earnings even if export volumes remain largely unaffected. There is unlikely to be any direct immediate impact on remittances. Remittances in Bangladesh proved to be resilient during previous financial crises in the world. The bulk (over 60 percent) of Bangladeshs remittances come from the Middle East, and less than one-third come from the US, UK and Germany. Strong remittance growth (44 percent) has continued in the first quarter of FY09. However, if a deep and protracted recession ensues in the US and EU, then the Middle-Eastern economies are likely to be adversely affected. Stock markets in important Middle-Eastern economies have already started to crash. Even if the current nearly $8 billion level of remittances is sustained, it would be challenging to maintain its growth momentum since 2001 if the world economy remains depressed for an extended period. Official aid flows may take a hit. Governments in rich donor countries are doling out massive amounts to rescue their domestic financial institutions. They may look for savings from other sources to finance these bailouts. Foreign aid budget is relatively easy to cut since the foreign aid recipients do not count as their voters. Import is probably the one channel through which Bangladesh may benefit. Import payments in August have reportedly been US$531 million lower than import payments in July. This decline in import payments is mainly due to the fall in prices of petroleum products, wheat and edible oil. Record high oil prices last year raised import payments to over US$20 billion in FY08, compared to slightly over US$15 billion in payments in FY07. The gains on account of reduced import payments can be sizable. Bangladeshs remarkable resilience so far to this ongoing global financial crisis and slowing growth in high-income countries is in large part because of the countrys relative insulation from international capital markets and the negligible role played by foreign portfolio investors in the country. This resilience also derives from sound policy framework and macroeconomic fundamentals. However, investor psychology is much less insulated than the capital market itself, as demonstrated by the sudden increase in volatility in Dhaka and Chittagong Stock Exchanges Sunday (October 12). The overall financial leverage in Bangladesh is low. Unlike the global financials, Bangladeshs banking system has no toxic derivative engagements. Barring a prolonged slowdown in the world economy leading to a drastic reduction in RMG exports, it is highly unlikely that the external shocks will increase the risk of asset quality problems or precipitate a credit crunch in Bangladesh. This is due to Bangladeshs low level of external debt, robust international reserves, and limited direct exposure to the international financial system. Low level of global integration shields Bangladesh from the global financial turmoil. However, Bangladesh is far from being completely insulated. Its heavy dependence on US and EU markets for merchandize exports is a real source of vulnerability as are remittances and foreign aid, though may be to a lesser extent. There is therefore no alternative to stronger policy vigilance and preparedness. Policy makers have to make sure that markets do not panic by continuously pro viding evidence on the economys resilience in various sectors. They must proactively monitor the channels through which the global financial turmoil may start creeping into the Bangladesh economy and take appropriate mitigation measures. Inflation has recently been the biggest macro policy challenge in Bangladesh. With the aggravation of the financial turmoil we have seen a sharp decline in global commodity prices. This makes the inflation battle a little easier for Bangladeshi policymakers. But new policy dilemmas are likely to emerge if export earnings begin to slow down and currencies of Bangladeshs competitor countries depreciate. This will put exchange rate policy under pressure to maintain export competitiveness. Market interventions aimed at depreciating the currency will dilute through declining international commodity prices to domestic prices and, consequently, undermine the objective of reducing inflation from its current double-digit level. CONCLUDING REMARKS As a matter of fact, a number of areas requiring policy intervention directed towards raising the competitiveness of Bangladeshs export-oriented sector and enhancing trade related capacity building have already been identified and put on the table. The task now is to seriously get on with the business of implementing the agenda. The upshot of the above discussion is to reemphasise that in the coming months and years Bangladeshs increasingly globalised economy will, of necessity, have to be adequately prepared to face the consequences of the fluctuating fortunes of the global economy. The current crisis facing Bangladeshs export sector should transmit appropriate signals to the countrys policy makers to the effect that greater integration into the global economy is not an unqualified blessing. Bangladesh cannot afford to be a passing taker in the globalisation process. We must strengthen our capacity to participate in global integration to a point where it can improve the terms on w hich we participate in this process. The price to be paid from globalisation will rise in direct proportion to the degree of the countrys lack of preparedness. A different school of thought According to us the global financial might not decrease our RMG export and in the contrary increase it. Bangladesh specializes in producing garments that are very low priced clothes that are for everyday use, which are not the high end designer clothe type. If we consider these products to be inferior goods whose demand decreases as income increases it good news for Bangladesh. Because of the global financial crisis if peoples income in the developed countries decline, their purchasing power will also decrease implying that they will shift their demand towards the cheap, inferior products the products that Bangladesh is exporting. As a result the volume of export from Bangladesh should increase and ultimately help our economy to grow better even during the global financial crisis. To captur e this golden opportunity Bangladeshi government must intervene and devaluate our currency so that export becomes more lucrative since foreign currencies, such as the USD is getting weaker in comparison to Bangladeshi Taka. But there is a cost for everything. In one hand when devaluating our currency can increase our exports it will also increase our inflation and make life difficult for our citizens. It is up to the government to decide the costs and benefits of such a policy which will be beneficial to our countrys economic health in the long run.