The Impact of Global Financial Turmoil on the Rmg Sector in Bangladesh

CHAPTER 1: INTRODUCTION- GENESIS AND SPREAD OF THE CRISIS

1.0 Introduction

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 companies affected were those directly involved in home construction and mortgage lending. Financial institutions, which had engaged in the securitisation of mortgages, fell prey subsequently. The rest is history.

The world economy has changed spectacularly since September 2008. What began as a slump in the US housing sector is now a global crisis, spreading to both rich and poor economies. Many believe that this may go down in history as the worst crisis since the Great Depression of the 1930s wiping out almost 10 trillion US dollar worth of value from stock markets over the past months. The triggers of the present global financial crisis were in the US subprime mortgage market, the crumple of which engulfed the global financial markets leading to a painful recession of the world economy.

Global consequence of the crisis includes:

 Sharp rise in Unemployment in the US, Job loss in few other countries.

 Sharp fall in the stock market price around...