Credit Crunch And Its Impact On Ryanair

4581 words - 19 pages

Contents1. Background31.1 Theories of Credit Crunch31.2 History of Credit Crunch 2007-200842. About Ryanair83. What effect Credit Crunch has on Ryanair?93.1 Risk Management in the past93.2 Risk Management of Ryanair in 2008114. Conclusion12References131. BackgroundThe world in 2008 suffers from a phenomenon called credit crunch. In this essay I am going to examine the credit crunch and its impact on Ryanair a Low Cost Carrier company. Credit crunch can be defined as sudden reduction in the general availability of loans, or increase in the cost of obtaining loans (Wei Ding n.d.) . If it evolves into a global financial crisis then the domino effect - due to the financial links between ...view middle of the document...

In other words, phased processes that imply S shaped growth curves: slow start-up, fast growth and leveling-off (Modelski n.d.). The K-waves rise from bunching of technical innovations that launch technological revolutions. According to Modelski and Thompson the 10th long cycle has been going on since 1973, from when they talk about the beginning of Information industries Age.When we study the actual events and close history of 2007-2008 Financial Crises we find that the theories of Hyman Minsky are relevant as well. Minsky talks about prosperous times when the cash-flow of companies rises beyond needed to pay off debts. At this time a speculative euphoria starts when lending gets beyond borrowers can pay and this leads to a financial crisis, or credit crunch. According to his studies there are swings in economy trends and swings are usually followed by booms and busts which are inevitable in free market economies, except if the government controls the economy for example by the means of regulation or central bank system. The accumulation of debts pushes economies to crises. Minksy identifies three types of borrowers the Speculative, Ponzi borrower and Hedge borrower. The hedge borrower intends to make debt payments from cash-flow from other investments. The speculative borrower believes he can service the interest on the loan but who must continuously roll over the principal to new investment. A Ponzi borrower relies on the appreciation of the value of their assets (e.g. real estate) to refinance or pay-off his debt (Minsky 1991).1.2 History of Credit Crunch 2007-2008The financial crisis started in 2007 with the loss of confidence in securitized mortgages. The cost of credit was negligible and the financial system was full with over-leveraged financial contracts. The hypertrophy of financial sector first led to a liquidity crisis when Fedeal Reserve (FED) and European Central Bank (ECB) had to intervene with capital injection. In spite of these actions the liquidity crisis spread world-wide and had effect on the financial and economy areas as well. According to Henry M. Paulson Jr., the US Treasury secretary, the credit markets are more important measures of severity of the financial crisis than the stock markets, although harder to follow. To measure the recent disruptions we can monitor LIBOR - the London Interbank Offered Rate -, the short-term Treasury Bill yield and TED spread. The difference between three months LIBOR and Treasury Bill yield is a measure of stress in the credit markets. In addition, the rate of higher-yield bonds indicates the willingness to lend to more risky business.1. 3-months Treasury Bill yield from May 2008 (New York Times n.d.)In September 2008 the yield of short-term Treasury Bill dropped and stayed volatile until mid-October when a steady decrease started.2. 3-month LIBOR from May 2008 (New York Times n.d.)LIBOR rocketed in mid-September and started to decrease from October.3. TED spread in 2008 (US Treasury...

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