Global and African Economic Prospects and Implications for African Trade, Trade Finance and Economic Integration;By Alemayehu Geda (With Daniel Zerfu and Kibrom Tafere)

I. Introduction
1.1 The Global Economic Crisis
The global economic crisis began to unfold following the financial crisis that has swept
across the developed countries. Over the past few years banks and other financial
institutions in the US and elsewhere were lending more widely to individuals with low credit
rating. Cheap credit and lax selection enabled many to obtain housing loans, which was not
possible earlier. The increased demand for property fuelled steep rise in prices in housing
sectors, leading to price bubble (IFRC, 2008). Consequently there was growth in trading of
Mortgage Based Securities (MBSs). The financial innovation of MBS led to derivatives named
‘Collateralized Debt Obligations’ (CDOs). As subprime borrowers began to default, CDOs
took the first hit. The resulting loss of confidence among investors led to fire sale of assets
(Haile Kibret, 2009). Lending institutions, thus, found themselves with loan assets worth far
less than first anticipated. When interest rates rose by 1% to over 5% in the US, it led to
increase in default rates, particularly in subprime loans. The extent of loss that such
institutions suffered was not clearly known. This has raised suspicion among lending
institutions, leading them into refusing to lend to one another. This has come to be known
as ‘credit crunch’, and it further raised the cost of credit. As a result of those series of
events, some of the biggest financial institutions of the world collapsed― eg. Lehman
Brothers in the US; or had to be rescued (nationalized) by governments― eg. AIG, Fannie
Mae and Freddie Mac in the US and Northern Rock in UK (IFRC, 2008.).

Lending institutions, having heavily hit by the credit crunch, adopted a more stringent
approach in lending to individuals and companies. This has made access to credit much
difficult and resulted in sharp decline in consumer spending. This, coupled with rising global
prices (both food and commodities) has pushed many developed counties into recession
(IFRC, n.d.), setting on the global crisis which we are attempting to understand its effect on
Africa in this paper. The global implication of these set of events could be gleaned from
Table 1, the recent IMF projection of the world economic outlook. According to this
projection, world output growth is projected to fall to ½ percent in 2009, its lowest rate
since World War II (See Table 1). Despite wide-ranging policy actions, financial strains
remain acute, pulling down the real economy. A sustained economic…..Click here to read Global and African Economic Prospects and Implications for

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