FDI figures are taken from http://unctadstat.unctad.org
2007 Foreign direct investment in Singapore in approx. $37B USD.
8 February 2007: HSBC WARNS OF SUBPRIME LOSSES
2 April 2007: NEW CENTURY GOES BUST
9 August 2007: CREDIT MARKETS FREEZE
14 September 2007: RUN ON THE ROCK
2008 Foreign direct investment in Singapore in approx. $8.5B USD.
17 March 2008: BEAR STEARNS RESCUE
7 September 2008: FANNIE MAE RESCUE
15 September 2008: LEHMAN BROTHERS GOES BANKRUPT
17 September 2008: LLOYDS TAKES OVER HBOS
3 October 2008: $700BN BAILOUT APPROVED BY CONGRESS
13 October 2008: UK GOVERNMENT RESCUES RBS AND LLOYDS-HBOS
16 December 2008: FED CUTS KEY RATE TO NEAR ZERO
2009 Foreign direct investment in Singapore in approx. $15.2B USD.
14 February 2009: US CONGRESS PASSES $787BN STIMULUS
2 April 2009: G20 SUMMIT IN LONDON
22 April 2009: UK BUDGET REVEALS HUGE DEFICIT
2010 Foreign direct investment in Singapore in approx. $38.6B USD.
Summary
Between 2004 to 2006, US interest rates rise from 1% to 5.36%. Homeowners, who have problems paying their mortgage loans when the interest rates were low began to default on their mortgages. Therefore in 2007, foreign direct investment total up to about $37B USD does not justify the fact that world economies are doing well at that time but rather an indication that problems are coming. Reference
The high amount of foreign investment in 2007 was a prerequisite of the sub-prime mortgage crisis in US. Huge amounts of loans were left unpaid, but Collateralised Debt Obligations(CDOs) which bundles loan securities, bonds and assets resulting from unpaid loans were sold to many financial institutions, banks. Credit markets freeze as banks do not want to lend to each other fearing the huge amount of debt loans / CDOs they owned. Reference
In 2008, a $700B USD was approved by the congress to rescue the US financial sector. I believed that parts of the bailout funds were parts and pieces of the $8.5B USD that made up the amount of foreign investment in 2008.
There were 2 liquidity injections made in both 2008 and 2009, a bailout and a simulus plan respectively. In 2008, an approx. $700B USD bailout was approved by the congress to rescue the US financial sector. In 2009, a $787B USD was approved by the congress said to save or create more than 3.5 million jobs in the US.
Both the bailout and simulus may contribute to a slightly higher FDI in the year of 2009 amounting to approx. $15.2B USD and subsequently a higher amount of $38.6B USD of FDI in 2010.
Impact of cash injections on the STI index by ECB
According to this BBC article dated 1 Mar 12, last December 11, 489B Euros of liquidity was injected to banks by ECB and this year 29 Feb 12, another 529.5B euros of low-interest loans were lent to 800 banks across Europe. According to bloomberg charts, STI index hit one of its lowest point on 19 Dec 11 at 2618.09 and rose about 14.3% to 2993.49 last friday on 2 Mar 12.
Outlook of STI
According to this BBC article, Greece are prepared to get the 130B Euros bailout. However, the bailout will not proceed till the deb swap with private bondholders on 8 Mar 12.
My Assessment
I mentioned that there were 2 liquidity injections in both 2008 and 2009 previously in this article. The impact of the liquidity injections were only visible on 2010, with reference to the FDI figure of $38.6B USD. The duration of the impact is about 1 year. If the same effect takes place this year, stocks are expected to rise till end of 2012, with or without the consideration of the bailout deal in March 12.
Global Recession Timeline
taken from http://news.bbc.co.uk/2/hi/8242825.stm
8 February 2007: HSBC WARNS OF SUBPRIME LOSSES
HSBC reveals huge losses at its US mortgage arm Household Finance due to subprime losses, in one of the first signs that the US housing market is turning sour, and that it could have a knock-on effect on the global financial sector.
2 April 2007: NEW CENTURY GOES BUST
New Century Financial, a leading subprime lender, files for bankruptcy. It is the first signal that something is seriously amiss at US mortgage lenders. Shares in other US mortgages banks like Countrywide come under pressure.
9 August 2007: CREDIT MARKETS FREEZE
Credit markets go into freefall after Paribas announces that two of its hedge funds are frozen due to "complete evaporation of liquidity" in asset backed security market. European Central Bank injects 170bn euros into the banking market and Fed lowers interest rates. Bank of England refuses to intervene in credit markets.
14 September 2007: RUN ON THE ROCK
Savers in beleaguered UK former building society Northern Rock begin withdrawing their savings after the BBC reveals the bank has received emergency financial support from the Bank of England. Northern Rock is in trouble as it was heavily reliant on the wholesale money market to fund its operations, and these markets have dried up.
17 March 2008: BEAR STEARNS RESCUE
US investment bank Bear Stearns is rescued by rival bank JP Morgan Chase after the US government provides a $30bn guarantee against its mounting losses. It is the first sign that, rather than easing, the financial crisis is getting worse but investors are relieved that US government prepared to act as lender of last resort.
7 September 2008: FANNIE MAE RESCUE
US government rescues giant mortgage lenders Fannie Mae and Freddie Mac, taking them into temporary public ownership after they reveal huge losses on the US subprime mortgage market. Their failure would have triggered a run on the dollar as many foreign governments had invested in their bonds, believing they were already guaranteed by the government.
15 September 2008: LEHMAN BROTHERS GOES BANKRUPT
US investment bank Lehman Brothers goes bankrupt after the US government refuses to bail it out. Merrill Lynch is bought by Bank of America after revealing it also is facing huge losses. Insurance firm AIG, which issued credit guarantees for subprime mortgages, is rescued the next day with an $85bn loan from US Treasury.
17 September 2008: LLOYDS TAKES OVER HBOS
Lloyds agrees a £12.2bn takeover of the ailing Halifax Bank of Scotland (HBOS), the UK's largest mortgage lender, after its shares plummet amid concerns over the firm's future. The UK government invokes a national interest clause to bypass competition law, as the new bank is responsible for close to one-third of the UK's savings and mortgage market.
3 October 2008: $700BN BAILOUT APPROVED BY CONGRESS
The biggest financial rescue in US history is approved after a gruelling debate in Congress, and initial defeat a week earlier. Republicans and Democrats alike were reluctant to bail out the banks with such large sums while ordinary citizens were suffering in the recession. Both presidential candidates endorse the bail-out.
13 October 2008: UK GOVERNMENT RESCUES RBS AND LLOYDS-HBOS
Two of the UK's major banks, RBS and HBOS, are in major trouble as financial markets collapse. Having merged with HBOS in September, Lloyds is hit by the huge debts built up by its new partner in the mortgage market, while RBS is struggling with its expensive merger with ABN-AMRO. The UK government injects £37bn to stabilise both banks.
16 December 2008: FED CUTS KEY RATE TO NEAR ZERO
The US central bank cuts its interest rate to 0 - 0.25% in an attempt to stem the deepening recession, and begins to consider a programme of quantitative easing to throw money into the economy to help make borrowing easier. It is the lowest interest in the history of the Fed.
14 February 2009: US CONGRESS PASSES $787BN STIMULUS
President Obama wins his first major victory in Congress as it passes a huge economic recovery plan aimed at preventing the US falling into recession as a result of the credit crunch. Much of the money will go to the states to prevent them laying off public sector workers, but some will be invested in infrastructure projects like roads, schools and green energy.
2 April 2009: G20 SUMMIT IN LONDON
World leaders pledge an additional $1.1 trillion to help emerging market countries and promise coordinated action to fight the slump and improve regulation. Gordon Brown emerges triumphant from a global summit, which he claims is a turning point in the crisis, and stock markets begin to revive. However, not all the money pledged is actually delivered.
22 April 2009: UK BUDGET REVEALS HUGE DEFICIT
The UK Chancellor Alistair Darling reveals that the credit crunch will lead to the largest budget deficit in UK financial history of £175bn, with total government debt set to double to £1 trillion by 2014. Mr Darling admits it will take two Parliaments, or 10 years to get the budget back to the position it was in before the credit crunch.
Published on 04 Mar 2012
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