Uncertainity In Global Economy

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Introduction A student received his offer letter for the admission into GMBA course, he was working in Australia, so did quick calculation and came up with an amount that he was required to transfer in USD (US dollars) for admission fees. After two months, when he went to the branch of National Australian Bank to transfer the money to Citibank Dubai, he was surprised to know that he need pay around 35% more than his initial estimate ,due to increase in USD to AUD(Australian Dollars) conversion rate. At the same time, he was told in his office that going forward there will be not any office parties due to cost cutting. After being landed, he came to know that there is large scale layoffs’ going on the industry, so he needs to be extremely cautious about his future job prospects. To make the things worst, he came to know that shares of company named Suzlon that he bought had a free fall and now trading at 10% of their peak value. After two months, when he got the topic for the Macro Economics, he realised that reason for all his losses and worries is same as his topic of assignment that is “Uncertainty in Global Economy”. Reason for Uncertainty {draw:g} Flattening of the world has made this depression a global phenomenon. The core of this crisis is the defaulting of the payment by the subprime borrowers. Subprime borrowers are those borrowers, who are not credit worthy and cannot be provided debt in the normal scenario due bad credit ratings. In 1990s, financial institutions have came up with the new financial instruments to provide credit to wide range of borrowers despite of their bad credit history. The main motivations behind these financial instruments are:- a) Greed to earn more and more profit. b) Push from Federal Reserve’s to make USA a spending economy rather than saving economy. All the banking transactions are governed by simple rule “Higher the risk, higher the return”, so bank used to charge higher interest rate from the subprime customers than prime customers Insufficient regulations and failure of existing regulations like Basel 2. Lack of transparency of auditing firms and credit rating agencies. Lack of integrated global risk management practises.

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