Dr. Kalu Idika Kalu, Chairman, BGL Group and Former Honourable Minister of Finance, inÂ this pieceÂ stated the causes and effects of the current global economic meltdown that started in the US in the middle of 2007 and through 2008 and has continued unabated and spread to Europe and other parts of the world which Nigeria is not in exception.
Most importantly, he discussedÂ how it affected the Nigerian Capital Market and the need to repositioning it for sustainable investor confidence and returns; role of market operators, regulators and other stakeholders. Excerpts:
On the current global financial crisis
The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and all through 2008 and has continued unabated. The Crisis started in the U.S (due to certain laxities in the US financial and regulatory system), spread to Europe, and has become global. Even countries not affected by the financial crisis are now affected by â€˜second-round effectsâ€™ as the crisis now becomes more fundamentally â€œeconomicâ€.
Around the world, stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with sizeable rescue packages to bail out their financial systems. On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihood of almost everyone in an increasingly inter-connected world.
According to the World Bank, the depth of the recession is difficult to gauge. Should credit markets remain frozen and asset prices continue to fall, then the decline in output over the next year could be extreme.
However, the extraordinary measures now being taken by fiscal and monetary authorities are expected to eventually restore confidence so that banks will no longer hoard cash, and businesses can obtain the credit essential for normal operations.
A collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialized economies have had a ripple effect around the world. Furthermore, other weaknesses in the global financial system have surfaced. Some financial products and instruments have become so complex and twisted, that as things start to unravel, trust in the whole system started to fail. The extent of the problems has been so severe that some of the worldâ€™s largest financial institutions have collapsed, AIG, the US insurance giant being an example.
The problem was so large that even banks with large capital reserves ran out of cash, so they had to turn to governments for bail out. New capital was injected into banks and other key institutions. That still wasnâ€™t enough and confidence was not restored. Shrinking banks absorbed available liquidity out of the economy as they tried to build their capital and are nervous about renewing lending. Consequently, businesses and individuals that rely on credit find it harder to obtain financing.
The US Federal Reserve, the European Central Bank, the Bank of England, central banks of Canada, Sweden, Switzerland and other countries in the world took several steps such as cuts in interest rates and injecting hundreds of billions of dollars in the form of bail-out to key sectors and institutions in the economy in an effort to ease the credit crunch.The causes and consequences of meltdown of the Nigerian Capital Market