part.3
KEY LESSONS TO BE LEARNT FROM THIS RECENT FINANCIAL TURMOIL ARE MULTIFOLD: * There are clear limits of excessive leveraging and off balance sheet transactions.
* While spreading of risks across borders help in diffusion of risks, it has serious implications for global financial markets which have wider consequences for developed and developing countries.
* Role of rating agencies and investors excessive trust in the ratings.
* Weaknesses of regulatory and supervisory models and the lack of oversight of off-balance sheet transactions and securitized products etc.
* The sub-prime debacle has served as catalyst for a general reassessment and re-pricing of risk across financial markets. This should augur well for future of structured finance products.

Financial earthquake and the AIG nationalization

Necessary actions taken and to be taken to tackle financial crisis:
Remedial Measures:
Depends upon the ability of the rest of the world to escape unscathed
Foreseeing Vicious circle emerging
Ramifications of the credit crunch
Due diligence and homework
Multi-billion dollar stimulus progr

Steps taken:

· Declaration of the Summit on Financial Markets and the World Economy : the Leaders of the Group of Twenty, held an initial meeting in Washington on November 15, 2008

· London Summit – Leaders’ Statement :2 April 2009: IMF $1.1 trillion programme of support to restore credit. (We have today therefore pledged to do whatever is necessary to: 1) restore confidence, growth, and jobs; 2) repair the financial system to restore lending; 3) strengthen financial regulation to rebuild trust; 4) fund and reform our international financial institutions to overcome this crisis and prevent future ones; 5) promote global trade and investment and reject protectionism, to underpin prosperity; and 6) build an inclusive, green, and sustainable recovery. )

* Steps taken by the Federal Reserve
* The World Bank Group’s response: MIGA, : IFC's Response (International finance corporation)
* Downsizing workforces
* Solutions so far: Bailout packages by individual states, and “straight jacket” solution by IMF.
* IMF SBA: Success of IMF package depends on good governance
* Monetary policy for the second half of fiscal 2008-09 in an environment of inflationary pressure, recession and foreign direct investment crunch. (With reference to Pakistan)
* In response to liquidity pressures in October, the SBP reduced the reserve requirement by four percentage points and eased liquidity requirements. In addition, the SBP has encouraged merger of four small banks. These measures seem to have stabilized liquidity conditions in recent months.

Steps needed:

We should know that “Beggar thy neighbors” policy is the best example of “government failure”.

* Coordination of monetary and fiscal policies: Fiscal and monetary policies have profound impact on the level and composition of savings, investment, output and employment, as well as viability of the external account
* Towards macroeconomic stability: Managing stabilization and growth
* DFIs for economic development in Pakistan. (With reference to Pakistan)
* Containing systemic risk
* Time to restructure the economy
* Inclusive and sustainable Programs
* broader and deeper regional financial integration
* As far as the current financial crisis is concerned, we should not confuse “short-term measures to restore confidence” (blanket guarantee and nationalization of failing banks) with “longer-term measures to reform financial sector governance structure”.
* To spread trickle-down effects

* Greater and more effective spending on education and infrastructure to build human capital
* Labour market reforms should be introduced because it facilitates hiring and improves the employment conditions of non-regular workers,
* Level playing-field and social justice will provide empowerment to under-privileged masses.
* Improve economic efficiency along with political stability
* Regulatory reforms will definitely boast the investment climate in the region.
* Broader and deeper regional financial integration
* Friends of Pakistan Forum. (With reference to Pakistan)
* Boost agricultural and industrial production
* Generate economic activity.
* A constant high domestic saving rate, high rates of domestic investments and open markets policies were instrumental to rescue the regional economies. (East Asian Economies)
* Effectiveness of the IMF bail-outs or massive aid packages depends upon Good Governance
* financial reforms and strategies of restructuring and downsizing
* Diversified but integrated sustainable macroeconomic policy frameworks
* Administrative skills, financial methodologies, marketing strategies,
* Institutionalization of more flexible exchange rate systems and
* Blanket guarantee for deposits and nationalization of failing banks
* The other precautionary element is to hold adequate capital as a cushion against risky investments.

Solution recommended / Strategies:

It will take a big change in economic policy and very radical, coordinated action among all advanced and emerging-market economies to avoid disaster. This includes:
• Another rapid round of interest-rate cuts of at least 150 basis points on average globally;
• a temporary blanket guarantee of all deposits while insolvent financial institutions that must be shut down are distinguished from distressed but solvent institutions that must be partially nationalized and given injections of public capital;
• A rapid reduction of insolvent households' debt burden, preceded by a temporary freeze on all foreclosures;
• Massive and unlimited provision of liquidity to solvent financial institutions;
• Public provision of credit to the solvent parts of the corporate sector in order to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
• a massive direct government fiscal stimulus that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower-income households, and provision of grants to cash-strapped local governments;
• an agreement between creditor countries running current-account surpluses and debtor countries running current-account deficits to maintain an orderly financing of deficits and a recycling of creditors' surpluses to avoid disorderly adjustment of such imbalances.

* Active official reserve management should be pursued,
* Better integration of markets and production structures
* Greater exchange rate flexibility ought to be institutionalized in order to manage any fluctuation in the markets,
* Corporate governance should be the apex of all the financial policies,
* Risk management at financial institutions, as well as coordinated efforts to harmonize financial regulations and tax treatments should be the mantra of all the regional countries and


Solution available to Pakistan:

Going by the conventional wisdom, monetary and fiscal stimulus is required to shore up a sagging economy. These can be in the form of tax and interest rate cuts and increased government spending.



We desperately need the IMF bailout package to avert the perception of default in the short and medium term. Besides, the IMF package would also help the government in correcting the macro-economic imbalances through a well-thought reform programme.
To diversify the export items as well as the export markets in order to keep our exports growing in a scenario marked by a global economic downturn.
To cut the import of non-essential items – all such items the country could live without.
Government to persuade China to invest in the country’s export-oriented manufacturing sector, in order to boost the country’s export earnings. At the same time, China may also be invited to invest in Thar coal and the energy sector to help the government in overcoming the current energy crisis.

* Role of DFIs

Foreign exchange depletion can be handled by:


(a) regulatory and punitive measures by the State Bank to stop the trade of dollars as a stock,

(b)Prevent money changers and banks from transferring dollars abroad without foolproof business or other legitimate reasons. For this, the Federal Board of Revenue and SBP should ask for fortnightly returns from the money changers and banks.
(c) Money laundering laws should be strictly implemented

(d) Export proceeds should be ensured within stipulated period.
(e) Transfer of deposits of indenting commission on import/export should be made mandatory

(f) foreign exchange for the import of luxury/unnecessary items should be arranged by the importers through their own external sources. The government should issue a list of items with customs PCT numbers for the import of which foreign exchange from internal sources may not be provided, and

(g) strict actions should be taken against over- and under-invoicing.

* The government’s role is particularly crucial in managing economic policy, anticipating and adjusting to economic shocks, facilitating transitions in economic policy and designing and implementing economic reforms.
* Aside from managing economic policy, the government has also a crucial role in ensuring the provision of a suitable regulatory framework particularly for the financial sector, wherein fraud and unsound management can have profoundly de-stabilising consequences for the economy. Furthermore, government intervention is desirable for addressing market failures such as those posed by the presence of externalities (e.g. pollution and congestion).
* The free market economic system is deeply rooted across the world including Pakistan. Despite its pitfalls, it is capable of delivering. It, too, needs to be regulated contrary to the general belief that free markets takes care of it. The current financial crises across the world and the meltdown of national economies clearly show the importance of regulating the markets.

International solution: An alternative would be to try to tackle imbalances from all sides. That would require co-ordinated action by surplus and deficit countries. Such attempts failed in the past because everyone had something to gain from sticking with the status quo. China might think Americans should save more but only as long as that did not curb their spending on Chinese imports. America would ask China to revalue its currency and boost its domestic demand. But it was also keen for China to keep buying its public debt.
The two big surplus countries in the rich world, Germany and Japan, are suffering deep recessions, which may bring them to the table. The problem of imbalances goes much wider than America and China.
America, Britain and other deficit countries have drowned themselves in cheap credit from abroad. Because the structural forces behind the global saving glut are unlikely to abate quickly, there is a real risk that the dangerous imbalances will persist—with America’s public sector as the new consumer of last resort. It would be foolish to focus on fixing the financial industry only to find that the public finances are left in ruins.

















Declaration of the Summit on Financial Markets and the World Economy: Group of Twenty, held an initial meeting in Washington on November 15, 2008.

Root Causes of the Current Crisis
During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.
Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption.
Actions Taken and to Be Taken
International financial institutions (IFIs).
A broader policy response is needed, based on closer macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging market economies and developing countries. As immediate steps to achieve these objectives, as well as to address longer-term challenges, we will:
Recognize the importance of monetary policy support, as deemed appropriate to domestic conditions.
Use fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability.
Ensure that the IMF, World Bank and other MDBs have sufficient resources to continue playing their role in overcoming the crisis.
Common Principles for Reform of Financial Markets
In addition to the actions taken above, implement reforms that will strengthen financial markets and regulatory regimes so as to avoid future crises. Regulation is first and foremost the responsibility of national regulators who constitute the first line of defense against market instability. However, our financial markets are global in scope, therefore, intensified international cooperation among regulators and strengthening of international standards, where necessary, and their consistent implementation is necessary to protect against adverse cross-border, regional and global developments affecting international financial stability. Regulators must ensure that their actions support market discipline, avoid potentially adverse impacts on other countries, including regulatory arbitrage, and support competition, dynamism and innovation in the marketplace. Financial institutions must also bear their responsibility for the turmoil and should do their part to overcome it including by recognizing losses, improving disclosure and strengthening their governance and risk management practices.
Commit to implementing policies consistent with the following common principles for reform.

* Strengthening Transparency and Accountability: Strengthen financial market transparency, including by enhancing required disclosure on complex financial products and ensuring complete and accurate disclosure by firms of their financial conditions.
* Enhancing Sound Regulation: Strengthen regulatory regimes, prudential oversight, and risk management, and ensure that all financial markets, products and participants are regulated or subject to oversight, as appropriate to their circumstances. Exercise strong oversight over credit rating agencies, consistent with the agreed and strengthened international code of conduct.
* Promoting Integrity in Financial Markets: Commit to protect the integrity of the world’s financial markets by bolstering investor and consumer protection, avoiding conflicts of interest, preventing illegal market manipulation, fraudulent activities and abuse, and protecting against illicit finance risks arising from non-cooperative jurisdictions. Promote information sharing, including with respect to jurisdictions that have yet to commit to international standards with respect to bank secrecy and transparency.
* Reinforcing International Cooperation: Call upon our national and regional regulators to formulate their regulations and other measures in a consistent manner. Regulators should enhance their coordination and cooperation across all segments of financial markets, including with respect to cross-border capital flows. Regulators and other relevant authorities as a matter of priority should strengthen cooperation on crisis prevention, management, and resolution.
* Reforming International Financial Institutions: Bretton Woods Institutions, The Financial Stability Forum (FSF).
* Mitigating against pro-cyclicality in regulatory policy;
* Reviewing and aligning global accounting standards, particularly for complex securities in times of stress;
* Strengthening the resilience and transparency of credit derivatives markets and reducing their systemic risks, including by improving the infrastructure of over-the-counter markets;
* Reviewing compensation practices as they relate to incentives for risk taking and innovation;
* Reviewing the mandates, governance, and resource requirements of the IFIs; and
* Defining the scope of systemically important institutions and determining their appropriate regulation or oversight.
source and refrence: This docments is prepared by our respected and dear EX cssforum member RAZ BAHI

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There are extraordinary people in very ordinary look. and
most of the time ordinary people do extra ordinary things.