1946 coincides with the end of the 2nd World War and Turkey trying to liberalize its foreign trade . Devaluation was applied to increase exports with liberalization. Country money has devaluated greatly. In 1958, Turkey still has a foreign deficit problem and devaluation was applied to increase exports again.
In 1970 we see same problem again ; current account deficit. Government has developed a policy to reduce imports by using develuaion. But it’s helpful only in shot-term. When the devaluation effect disappears, the current account deficit starts to be given again. In 1977-80 period, it’s very important for Turkey because this crisis is the most effective and serious crisis. There are some reasons to occur this crisis. These are regional and from outside reasons.
In 1994 in Çiller time Turkey had a crisis. Current account deficit was very important issue. Unfortunately, she applied false economic policy for Turkey and finally inflation was increased. In 2000-2001 crisis is the on eof the most important crisis for Turkey. It was also extremly serious crisis. In 2008- 2009 crisis has been short in terms of time. But it’s effect was huge. Especially it effects for unemployment and growth rate.
In 2016, we can see the economic damage with coup attack. It still effects Turkey’s economy. With all these causes inflation increased in Turkey. Savings and investments, which are among the most important sources of economic growth, will start to decline with inflation. We can struggle inflation with some points. These are ; Fiscal Policy, Money Politics and Wage and Income Policy. Central bank applies Money Poitics and it has to be free.Foreign currency inflows reduce the exchange rate. Imports are increasing, current account deficits are increasing and foreign debts are increasing so it’s causing crises.
2008 Crisis In the US , interest rates increased and and its reduced low level of investment in US. It caused increase in number of unemployment. Also mortgage system was effective. House prices was increased and also by FED ,interes rates was increased. Main aim was, when interest rates increase, demand for house will decrease and house prices will decrease. Also, they expect that the investors taking their money from the stock market and they will invest their money to deposits.
Unfortunetly, increasing in interest rate coul not pay their credit. They started default their credit. Banks deal with this porblem actually take back the houses. That’s why Banks demand quarantee to eliminate the asymmetric information. Banks took back house but they can not sell house again. So they can’t earn their money again, liquidity problem arises because there is no cash conversion. Problem started with bankruptcy of bigger banks. In Interbank interest rates started increasing. No one give debt each other. Central bank aimed that, give money to real sector. But banks can not know which one is reliable than they dont give money. They tried to hold money so Central Bank’s aim couldn’t effective. In 2008 Lehman Brothers went bankruptcy. It caused loss of confidence.
What About The Banks?
Central banks decrease the interest rate to 0. In financial system they aim to earn money by giving debt-money to others. Negative interest rate is a negative. When we give debt low interest rate we tend to earn back money with high interest rate in the financial system. Money politics loss their power in real economy. Financial innovation and securitisation; technique through which banks loans are transformed into marketable securities.
Mainly ; asymmetric information mod hazard. For financial liberalization, integration of financial markets leading to contagion. It effect national and domaestic markets quality of institutions such as bank. Last 40-50 year there is a huge financial evoluation. It started especially 80’es which is has develuation start. Also recession was important.
The European Union was founded in 1993 in the world. One of the top 3 members of this organization is the United Kingdom. But for some reason, the British wanted to leave this organization, and in 2016, the public voted to quit this organization. The separation of UK from this organization is called Brexit. Brexit literally consists of British and exit. The public vote held on 23 June 2016 yielded a surprising result. 52% of the people of England voted yes and government decided to leave from European Union. According to economists, Brexit will affect economy of United Kingdom and European Union on a large-scale,and that includes bad scenarios both of sides.
Last 5 years, Brexit is going to run and run in the World,especially Europe. So many decisions were talked, were voted and it is going on. So what is the Brexit which occupies the agenda? Brexit is an acronym for “British exit”, which refers to UK’s decision to leave the European Union in the June 23, 2016 referendum. In this referendum, 51.9% of public voted to leave from European Union. Prime Minister David Cameron announced his resignation the following day, because he started the campaign of remaining in EU. According to this conclusion, United Kingdom government announced that Brexit process is started and it will be concluded till the 31 January 2020. If history of UK is looked, UK joining the European Economic Community (EEC) in 1973 can be seen. However, Brexit referendum was conducted in 1975,this was the first Brexit referendum and 67% of UK public did not want to leave from EU in this referendum. Let’s turn back to recent history again, after the Mr.Cameron’s resignation,the following month Boris Johnson,who the hardline supporter of Brexit, was elected prime minister. Normally, UK was expected to leave the EU by October 31, 2019,however, UK Parliament voted to force the government to seek an extension to the deadline and also delayed a vote on the new deal. On the other hand,what’s the reasons of Brexit? European Economic Community (EEC) was founded in 1957 helping by USA. EEC’s aimed to create customs union and single market, and also keeping France, Luxembourg, West Germany, Belgium, Italy, Holland together economically.
In 1961, UK applied this community, but French President General de Gaulle opposed it. UK became a member of the European Economic Community in 1973 when General de Gaulle resigned. The European Union was established in 1993 with the Maastricht Treaty after the new duties and responsibilities were established. Although UK was a member of the European Union, it used its own currency and the Schengen visa did not apply to them. The 2008 crisis affected the weak EU member states. Greece, Spain and Ireland were affected by this crisis. Especially the fact that Greece’s economy has come to a very bad point, that Greece needs to be helped and that this will be a burden to the EU and that a large part of the burden will be shared between Germany, France and England has created a problem. The biggest problem here was in UK. An important problem for England was the immigration problem. The rise of racism and anti-immigration in Europe has been effective for UK’s exit from the European Union. David Cameron,who is prime minister, promised to leave the European Union in a referendum if he won an election in 2013. In the referendum, UK’s rural areas, extreme right-wingers and areas of income injustice voted yes. As a result, UK decides to leave the EU. The UK is the fifth largest economy in the world. Their leaving from the EU will be influenced both the UK and the European Union economy.
What will happen in Europe?
Europe and the United Kingdom have been together for more than forty years. Regulations and create according to the European Union system and its functioning. Implementation, markets, tariffs, banking and financial rules according to the European continent have been rearranged. According to the global market has seen a lot of impact. Consistently, the UK’s savings have increased in parallel to this, in order to reduce opportunities for the EU after the Brexit. On the other hand, it may meet tariff increases in foreign trade, and due to uncertainty there has been an assessment of the incoming investments. Concerned about the interruption of initiatives in the European market with a population of 500 million people, some financial transactions aimed to reduce their structuring and planning on the UK and accelerated their various financial plans. In short, the increasing uncertainty has greatly affected the decisions of financial institutions that prefer to make long-term plans in London.
These factors especially affected the European financial markets both positively and negatively. In this case, the growth of the country is also negatively affected. In the event of a withdrawal from the EU, UK national income may shrink from 1 percent to 9 percent in the long run. In the short term, housing prices may fall sharply. Companies ‘borrowing costs may increase. Important Following the announcement of important institutions such as the international monetary fund, serious ambiguities began to emerge in the post-Brexit countries’ financial targets and markets in general. The idea that uncertainty in the financial markets will have negative effects on exchange rates, interest rates, credit outlook and financial stability started to be fair.
Again with Brexit, the volatile increase in the markets and the expectation of portfolio mobility increased. Disclosures emerged that portfolio outflows may have an impact on the financing of the current account deficit in the long run. As London is a global financial center, capital markets may be affected negatively. Similarly, financial institutions in the UK have close ties with the EU business community, and the tight relations between fund managers and the EU financial world have been adversely affected by Brexit, leading to a reduction in transactions in the European capital markets. In the long run, a reduction in investment is likely to occur if international rating agencies have a negative assessment of the UK economy. London was a center for financial services. Therefore, the UK could lose its global policy-making power over financial services in the EU and other economies Financial services and insurance accounted for 8% of the UK’s gross value added. It is likely that the financial services sector, which gives foreign surplus in trade relations with the EU, will face new and additional regulations after Brexit.
On the other side is United Kingdom
For the UK, leaving the EU without an agreement (no-deal Brexit) will be challenging enough. Brexit-induced concussions will shake the UK in business, security, legal, cultural, political, and especially economic aspects.One of the biggest impacts of the Brexit deadlock is in the economical way. The increase in foreign investments, the expansion of supermarket chains’ import stocks, causes the UK Government to make decisions to increase customs duties. UK-based companies are stocking everything as much as possible. United Kingdom Warehousing Association (UKWA) said that: “We are facing an incredible storm in the storage and logistics sector.”
Although the UK is one of the largest financial centres in the world, the government’s acceleration of its work for the no-deal Brexit continues to lead the UK to a dead end in the money market. To illustrate this, the British pound traded at 1,50, against the US dollar on June 23 2016, and is now down to 1,30.
According to British Finance Minister George Osborne, if Britain leaves the EU, it may be permanently impoverished. In an article published in The Times newspaper, George Osborne said that the country’s economy could downsized to 6 per cent by 2030 if the country left the union, according to a research conducted by the Treasury Department.
The world’s 5th largest economy and the world’s most vibrant financial movements the British economy, based on 2018 data*, the total growth of only 1.4 percent. The growth rate of 0.2 percent in the last quarter and the 0.4 percent contraction in December can be considered as one of the biggest proofs that Brexit plays a major role in the UK economy. The British economy has downsized by 2 percent since the announcement of the Brexit referendum result. According to a joint survey of large firms in the UK, around 56 percent of the business community said they suspended some of their relations with the UK because they considered Brexit a serious risk.Most British media have said they expect expectations of a slowdown in the UK economy or a reduction in investment within 2 months. Given the uncertainty in investments, the UK suffers a lot of trouble. “The Brexit deal will reveal some deferred spending, but we will lose some forever,” said Mark Carney, Governor of the Bank of England. The Bank of England’s negative outlook for investments is forecast to decline by 2 percent this year and by 1.5 percent in 2020. Moreover, it is not difficult to understand that most of the momentum loss in the economy is caused by Brexit. Despite Brexit, the revival in the economy is expected in the last quarter of 2019, but the idea of leaving the EU is expected to cause a serious decline.
As a result, Brexit’s targeting the UK in many ways, especially in economic terms, and the deterioration of its consequences, will adversely affect European citizens living in the UK and British citizens living in Europe. It is a question of whether the steps taken by Britain, which has problems in both domestic and foreign trade, especially after Brexit has affected the economy so much, will prevent the damage.
AS A RESULT
The European Union established in 1993, has been shaken by Britain’s decision to leave. England is the most important 3 countries in European Union. These are Germany, France and England. 23 June 2016 Britain voted the leave European Union. This situation will affect the British and European Union economies. After David Cameron’s say to ‘leave’, this topic too discussed. And 23 June 2016 made referendum. In referendum %51,9 ‘yes’ vote. The Britain people decided to leave the European Union.After the David Cameron, Theresa May takes over. however, Theresa May failed Brexit. So takes over Boris Johnson. Boris Johnson supports Brexit. The Brexit decisions passed through the House of Commons. And England plans to leave the European Union in the new year.Germany and France do not support the Brexit decision. They know that this decision will affect them bad. That’s why they try to keep England out. They want the UK for taxes and tariffs so far. This money is a billion euros. Britain reject this money and says than the Brexit will be. England is leaving European Union. This leaving will bad affect both the UK and the European Union. So that England will excluded from trade agreements. These are implementation, markets, tariffs, banking and financial rules. They made in European Union, will have to make new ones.This situation will affect the British economy in terms of foreign trade. For example tariffs, in European Union these tariffs are affordable but when UK leave the union, the tariffs will change and new ones will come. Will probably be more expensive. In this case the British economy will be affected.
In conclude,The European Union is losing a big economy. The world’s leading financial center and the second largest economy in the union. Also London financial center is losing such an important place. This is the heart of trade in Europe. They are many transactions such as crypto currency, stocks. In this case, the return to the European Union will be quite negative. Actually, the European Union is going through difficult economic and political times. Separatist policies spread across in Europe. Economy is bad in European Union countries Italy, Spain, France. These countries are important countries of the union. Brexit will adversely affect the European Union and may even lead to chaos.We will see more clearly what changes are taking place in both the European Union and England, after the UK has left the union how they have been affected.
While international economic integration expands, growth and development followed it directly proportional. At the same time it caused financial crisis to countries and among countries. In 2008, worldwide recession began and it was triggered by 2007 financial crisis, this was the most severe example. On the other hand there are several recent example of financial crisis. As a example of that is currency speculation against european currencies caused collapse of monetary arrangements in Europe at the 1992, so it damaged number of EU countries. This currency speculation was shown against Mexican Peso at the end of the 1994. And it caused collapse of Mexico. In 1997, some of East Asian countries were thrown into recession by a wave of sudden capital outflows.
Omission of Russia’s international debt influenced as far as Latin America. Financial crises destroyed governments, economies and individual lives. Resulting costs and losses have led to precautions and treatment. This article examined main financial crisis which made a sound in the world economy, and also it proposed policies to prevent or minimize financial crisis. Most reports are for consolidating international financial reforms. International Monetary Fund and other financial institutions manage these reports, they make the decision. Last topic is that need to having lender and conditions of lender impose.
What is a Financial Crisis?
There are several main things that the financial crisis has. According to the recent crises, a banking crisis, an exchange rate crisis, and a debt crisis are the most potential reasons which are vulnerable. At this point, countries influenced easily in terms of finance with each other. Banks have responsilibities to savers and borrowers as an intermediaries.It calls disintermediation. Banks must meet households needs, such as, investment, savings. If the banks cannot provide the supporting, a banking crisis occurs and all banks in country are influenced, banks are threatened with bankruptcy. If its assets are lower than its liabilities and its net value is negative, the bank is considered bankrupt. End of the 2007 was a clear example of a banking crisis. This is not only considered on an investor basis,it includes insurance companies or securities firms which lose their financial products and savings.
When the savings are lost by households,consumption decreases and recessionary in economy increases. During a banking crisis period, if a bank is not affected, they do not make the loans, and also layoffs ocur. Recession falls into deeper. As we mentioned before, other main cause is an exchange rate crisis. When a nation currency falls unexpectedly-it can be any exchange types such as, fixed, flexible, or intermediate- exchange rate crisis occurs. If the exchange rate is fixed,it caused lose international reserves and it goes on with sudden devaluation.There is no safety for any exchange rate types, but flexible exchange rate safer than fixed one is vulnerable to an exchange rate crisis. Before the Asian Crisis(1997-1998) banks were debted dollars and their nation currencies collapsed,dollar increased. Too many banks failed because they are reccesion channels in the exchange rate crisis. In the debt crisis, debtors can not pay their debts and restructure step in.
This restructure includes lowering the rate of interests, lengthening the payback period, and partial forgiveness, etc. Debts can be domestic and external. Domestic debt involved citizens and foreigners and external debts involved foreign creditors,but these depend national rules, it can change. Restructuring can not be solution at this point because assets value of insolvent lenders will reduce so they will become insolvent. That occurs if liabilities drop below assets. Crisis of debt manifest itself different way in the 2011 euro crisis. Firms and banks didn’t pay their accumulated debts collapse cause of the housing bubble.
What are the sources of International Financial Crisis?
Financial crises are often associated with multiple facts. There are 2 main things are sources of crisis. In the first type is Macroeconomic imbalances are hard to predict when the crisis started. Second type is fast volatile flows of financial capital in the country. If a investor’s expectations change, it caused fragility in financial sectors. Such crises can be confusing because in some cases it has recently affected countries with particularly strong international positions and stable macroeconomic policies.
Macroeconomic Imbalances triggered some crisis as an insecure exchange rate system. Also in the different financial tables, these imbalances directly influenced large budget deficits and current account deficits, private sector debts. If the history is looked at, countries allowed to higher inflation rates and large budget deficits,so it caused disturbed current account and real appreciation. Thus,precautions should be taken. However, all crisis do not connected with poor fiscal or monetary management. Private sector make an over invested to real estate and financial instruments. As an example, the 2007 crisis showed these crisis sources in different times. When the house prices started to increase, private investors pulled prices to unsustainable levels even they have incentives in USA, UK, Spain, etc.
Countries with high savings rates and high current account surplus have thrived the investment with global imbalances that lend to countries with large current account deficits and significant investment demand. Collapse of housing bubble caused the beginning of crisis. Banks went bankrupt and were unable to lend, which caused stagnation in the USA at the end of 2007, so consumer and business demands declined. It can be divided into 2 as private sector and government imbalances. Private sector take a decision about saving and investment. And it cause of imbalances. If government tax collections decrease and social and health spending increases, government imbalances occured.
Economic activity and income of the private economy played a great role in the government incomes, but if in the period of recession, these are seen to fall. Unemployed, retirement spending and health care programs can increase after unemployment. Decreasing of government tax collections and increasing of social spending are creating an automatic balancer and resisting the recession. But it caused budget deficit and it is unsustainable. These unsustainable deficits depend on banking system and economic durableness. As an example, EU countries had a goverment financial problems after the crisis among 2007-2009. In some of countries, there were rising social and pension spending, decreasing goverment taxes because of good management of public finances and balance of income and expenditures. In contrast, Spain had bigger deficits than others because Spanish government had difficulty borrowing and the government didn’t respond to its debts so investors hade a doubt about solvency of the government. It caused sovereign default which the government cannot pay back its loans.
Volatile Capital Flows
All crisis cannot connected to economic imbalances and unsustainable deficits. Developing and expanding technology directly influences national economies and and makes them vulnerable. The effects of financial deficits triggered in the last decade have spread internationally, this crisis can be called contagious. Many Asian countries were influenced this kind of crisis. There were some economies that had underlying weaknesses in their financial sectors, countries like Singapore, Hong Kong, and Taiwan were adversely affected even if they did not have the same weaknesses. Volatile financial capital is the main cause of crisis and it was supported from developing technology. Discovery of major emerging markets and investors of high income countries wanting portfolio on a larger scale caused hundreds of billions of dollars to be invested throughout the world. Most savings keep savings in most countries, however, that savings are constantly increasing and savings have entered international capital markets. It moves relatively freely comparatively to interest rates and exchange rate expectations. That also brings these opportunities.
Portfolio managers monitor each other for market situation, and it triggers to create herd behavior. The banks borrow internationally and lend locally. For instance, when international market funds are used for short-term and long-term loans, international loans must be repaid, and it caused intensify the problems. International lenders should roll over the debt and they have to new loans. In contrast, if lenders believe the problem about borrowing bank, they do not want to roll over the debts. Liquidity problems ocur when the bank’s assets are linked to real estate loans, but in short term, real estate is not liquidity, there is no payment. When some of banks have this problems, attempts to evacuate property further lower prices and since every bank with real estate investments holds a portfolio of sudden decreasing value, it weakens the payment power of the banking system. If banks want to lend additional loans while selling their long-term assets, they can resolve themselves without crisis.
Lenders which believing a crisis throw out to roll over the banking debts and illiquid banks come to the brink of bankruptcy. There are 3 factors which disorganized the economists and policymakers. First one is multiple equilibria depending international lenders, ather one is self-fulfilling crisis-it is not prearranged, last one is illiquid banks-they cannot insolvent. These 3 factors mean possible to prevent these kind of crises. Partially requires banks to pay more attention to the maturity adjustment between their debts and assets. In some cases, this requires a higher level of control and regulation for banking authorities. International lenders should be further informed about the activities of their borrowers. This provides greater flow of information, the use of standard accounting practices and overall greater transparency requirements in local and international financial systems. Finally, when a crisis occurs, international agencies called to make emergency loans like the IMF should be able to distinguish between bankruptcy and non-liquidity. The distinction is more complex than it was thought, but it is very important because the appropriate response will vary depending on the borrower’s country’s expectations in the short and medium term.
The Mexican Peso has decadented and as a result; It had elements of a crisis arising from macroeconomic inadequacies and variable capital inflows and weaknesses in the financial sector. There were unlimited signs of macroeconomic disability, including the overvalued real exchange rate and a large current account. Moreover, if the Mexican government followed a relatively simple policy and did not take into account the external interest payments on its debt, the government budget was not much. In the early 1990s, this decline declined, from 22.7 percent in 1991 to a total of 7 percent in 1994. Between 1990 and 1993, Mexico lived an annual capital of $ 91 billion, or an average of $ 23 billion per year. Owned capital was private portfolio investments ($ 61 billion), direct investments ($ 16.6 billion) and bank loans ($ 13.4 billion). President Salinas’s management allowed foreign capital to support mexican savings. (1988-1994)
Mexico realized a large current account deficit equal to 5 percent of GDP in 1991 and 6.5 percent in 1992 and 1993. The voluminously input of foreign goods and services allowed further investment by providing capital goods that Mexico could not be on ones’s own and satisfying depletion, and it allowed domestic factories to produce investment goods through foreign goods and thus the strategy of the Salinas government and it worked. On January 1994, The North American Free Trade Agreement (NAFTA) between Canada, the USA and Mexico entered into force and US-Mexican trade expanded (23.7 percent). NAFTA relied on the institutional stability of Mexico and guaranteed access to the US wealthy market for goods produced in Mexico. In February 1994, interest movements in the United States and exchange rates around the world caused big losses for a number of banks and other investors. Portfolio managers began to reevaluate their investments and seek ways to reduce their exposure to risk. Political events also forced investors to review their financial position in Mexico. First, as the NAFTA began effectuation on January 1, 1994, livelihood farmers in Mexico’s poorest state of Chiapas revolted against the federal government.
Second, in March, the presidential candidate was killed while campaigning for the post. Leading the signing and implementation of NAFTA encouraged the view that Mexico is a safe, stable and modern country, while these events shocked investors. President Ernesto Zedillo admitted that he was overvalued in December 1994 and announced 15 percent devaluation. Transactions this measure may have been explicated as a cautious and responsible move to address an overvalued currency problem. Unluckily, the actions of President Zedillo elicited that his administration did not understand the severity of the crisis. As a result, the devaluation announcement of Zedillo’s 15 percent value sent money and financial markets to even greater convulsion. More investors fled from the country, the credibility of Mexican exchange rate policies entered into a serious questioning. Damaged and both foreign and domestic capital continued to leave the country. In March 1995, pesos fell more than seven per dollar; this value was a loss of more than 50 percent of its value compared to the beginning of December 1994. Zedillo addressed the crisis in the short term, with financial support from NAFA partners and the IMF. The reprieve came in late January 1995 in the form of a loan and line of credit. In the weeks when peso-type property owners began to relax in a currency exchanger information for their terms, the money markets calmed and the rate of capital flight slowed. The peso rehabiliteted some of its depreciation and was traded at six per dollar in late April 1995. Medium and long-term problems, saving measures were implemented, which reduced government spending, increased taxes and reduced consumption. The major current account deficit at the end of 1994 increased the fragility of Mexico’s financial system against the capital flight and was responsible for the discharge of dollar reserves. For this reason, spending derogation policies were an appropriate step to address the crisis, as tax increases and cuts in government spending would help impairmant the current account deficit. The loan was limited due to high increases in interest rates and new limits on bank loans.
These measures reduced consumption and increased savings, provided a larger pool of domestic funds for investment and reduced the country’s dependence on foreign capital inflows. After all, the drop in depletion and government spending brought stability; Mexico’s GDP decreased by 6.2 percent in 1995 and many people lost their jobs. Most of the foreign capital is invested in short-term portfolios rather than long-term direct investments. This distribution is not naturally insecure, but when the peso is overvalued, both foreign and domestic investors are afraid that a surprise devaluation will destroy the value of their assets, and they have begun to turn a large number of pesos into dollars. 15 percent devaluation of Mexico was a step in the right direction, but rather undermined market fears, it undermined the trustworthiness of the exchange rate system.
Domestic Issues in Crisis Avoidance
Some crises can not be prevented. However, there are steps countries can take to minimize the likelihood of a crisis and the damage they do when they happen. In addition to the need to maintain reliable and sustainable fiscal and monetary policies, governments should participate in active observation and collocation of the financial system and provide timely information on key economic variables such as the international reserves of the central bank. Envisioning effective policies in these areas is slightly simple, but there is a wide range of expert opinions in other areas and consensus is difficult to understand. Of the economy. Credit dries, investment disappears, consumption drops and the economy become dull. For this reason , even if governments have to spend income to energise the sector, there is a huge encouraging to mobilize the financial sector. This creates a contradiction for policymakers because if you fail, the information you save often causes people to take more risks, including bankers.
Moral Hazard and Financial Sector Regulation
Economically, this is a moral hazard problem. Moral hazards arise when there is an encouraging to hide basic information or act in a way that creates personal benefits at the cost of a common purpose. Banks and other institutions are encouraged to make risky investments that provide higher returns if they know they will be bailed, ın the financial sector . If there is a general policy to protect the financial system from crumple, moral hazard problem is inescapable. There is a general agreement that a key to abatement moral hazard in financial institutions is to increase capital requirements in order to raise the current capital level during the crisis. Includes items such as capital, equity, undistributed profits, bank reserves and several other financial items. Taken together, it is the investment of bank owners. Various international agreements have been signed, including Basel III, signed in 2010, aggregately regulating bank capital levels known as the Basel Agreements. Since the latest of the Basel Agreements (Basel III) was signed in 2010, it has not been tested with a new crisis, and there is disagreement over its real effectiveness in preventing another major financial crisis. Another way in which a creeping peg exchange rate system increases a country’s fragility to crisis is that it is sometimes politically difficult to exit from the system if it becomes overvalued. When a government announces a change in the system, it runs the risk of losing its credibility. Both domestic and foreign economic agents incorporate the existing system, and a extempore large devaluation leads to economic losses and a loss of confidence in the country’s policymakers. The end of Mexico’s creeping peg in 1994 is a good example.
Exchange Rate Policy
Many countries adopted a crew exchange rate in the 1970s and 1980s as part of the inflation and anti-inflation strategy. Included in fixing the exchange rate to a major world currency such as the dollar or euro, or to currencies that contain the country’s major trading partners. The pegs generally aim to balance the real exchange rate better than trading partners in a country with high inflation.
If domestic inflation is higher than external inflation, nominal devaluation keeps the real exchange rate constant. Definition of the real rate as Rr = Rn (P*/P) then if the change in P (domestic prices) is greater than the change in P * (external prices), the nominal rate Rn must increase to keep the real rate constant. The maintenance of the anchor requires the monetary authority to use discipline in the creation of new money, and in this sense it is anti-inflationary. At the same time, countries often try to strengthen the anti-inflation trend of the crawling hook at a slower pace than the difference between home and foreign inflation. This creates a real forecast in the exchange rate and is planned to act as a brake on domestic inflation, as foreign goods are becoming cheaper in real terms, limiting the price increases that domestic producers can apply.
Capital Controls Generally ,economists think that the free movement of capital is a covetable goal, because it allows investors to send their financial capital to the highest return, which raises world welfare by putting financial capital in its most valuable use. However , capital mobility allows countries to invest more than possible only with their own internal savings, which again increases world welfare when there are valuable investment projects and inadequate savings to realize them. Frequently, capital flow limitations are applied by limiting transactions that are part of the financial account of the balance of payments. Capital movements are usually allowed as they are essential for trade to support transactions in the current account. As a result, one of the main ways firms can overcome capital account limitations is to overpay bill import. Alternatively, they can undo exports so that the notifications received are smaller than the real payments, and the difference can be deposited abroad without reporting to the authorities. For these reason , as a general rule, inflow limitations appear to be more feasible than effluence limitations. However, restrictions on capital inflows cannot be stopped when a crisis begins. After all, there is an progressing discussion about the benefit of limiting capital outflows when a crisis begins. Many crises argue that a provisional limitation in capital outflows can help stop a crisis by artificially extenuating foreign currency demand, as the country includes a speculative attack on the country’s currency. Abstractly, this will increase the value of the domestic currency and eliminate the expectations for a large decrease in its value.
Nowadays, the importance of having long term care insurance is recognized. It is now being considered as a necessity as the life expectancy of people is seen to be much longer than before. This is why you are also interested in getting a policy for yourself. You may want someone to assist you with your daily activities when the time comes that you cannot able to do it yourself. If you seriously want to get a policy, you should need to know first what your options are. You can request for long term care insurance quotes from different carriers so that you can study each of their products.
However, you need to be clever so you can assess each carrier’s policy well with the quotes you have. Contemplate if their services are reasonably priced. There are some insurance companies who are quite unreasonable with the price they declare for their services. On the other hand, there are some companies who offer cheap long term care insurance but the coverage of their services is somewhat questionable. You may want an extensive coverage for your long term care insurance with a reasonable price definitely. Thus, you have to be careful and smart when assessing each of their policies based on the long term care insurance quotes you have in hand.
When you study each quote you have, make sure that you are reasonable as well. An insurance policy offered by one company may differ from the policy of the other companies. They actually vary based from the features and coverage of the insurance. Make sure that you know how to compare and contrast. Remember that you are trying to go for an insurance that will give you the services and coverage you may need in the future.
Moreover, you might be concerned which carrier you will be getting for your long term care insurance. A well-established insurance company is truly a good choice. Check with your state which companies are in good standing and reputation when it comes to long term care insurance. Different trusted agencies (e.g. Moody’s Investor Services, BBB and Standard and Poor’s Insurance Rating Services) give ratings to several insurance companies and you can search for that too. These financial companies have predetermined standards to follow when giving ratings with different long term care insurance companies. An insurance company who receives a good rating may signify that the company is running smoothly with its business. Keep in mind that you need an insurance company that is financially stabled to provide their services when you already need it.
Having ltci quotes to study is undeniably a wise move. It does not only save your time and effort but also gives you the benefit of being able to smartly assess each policy. Long term care insurance is really important in one’s life. No one can predict what the future will bring so it is better that you are prepared for it. Give yourself the best long term care insurance. You can get that insurance for yourself after you have evaluated which policy that best suits your needs.
Ideally, retirement planning should begin in your 20s—the age when you are just at the start of building your career. As we pointed out in our post entitled, Financial Management Tips for the Millennial Caregivers, the younger generations ought to look as far ahead as they possibly can. As soon as you start receiving paychecks, you should dedicate a portion of your salary to your retirement savings. This way you get into the habit of planning and saving early.
However, the truth is that many individuals are not able to do so. In fact, individuals approaching retirement still find themselves underprepared for any of the costs. In a survey conducted by the Associated Press-NORC Center for Public Affairs Research, one-third of their respondents age 40 and older have not done any kind of planning for their own long-term care needs. Moreover, nearly four out of ten of them mistakenly believe that Medicare will cover their care needs.
What makes matters more challenging for most individuals is that life spans are getting longer. Yes, this certainly has its benefits—more time to spend with the family and to pursue other passions. However, it can take a disastrous turn when none of the health conditions associated with old age were planned for.
A successful retirement requires a great deal of planning, whether we accept it or not. This brings us to an important question about retirement planning: Where do I start?
Set Realistic Goals during Retirement Planning
The picture painted by many individuals of the so-called golden years often involves traveling on cruise ships and sipping fruity cocktails. Yes, taking the time to travel during retirement is wonderful goal and it is very much possible and deserved. However, no one can travel every day because we all know that it is expensive.
People planning for retirement can make a list of how they wish to spend their time—travel, volunteer, pursue a hobby and turn it into a business. Beginning a retirement plan must start with a goal—a realistic one.
This also applies to a person’s finances. Set a realistic amount which you will regularly set aside for retirement. As salaries and other incomes rise, then the amount being saved one a regular basis should also increase.
Long Term Care Planning
Now, let’s address one retirement challenge that is leaving everyone at a loss. Long term care is a hot topic among retirees because of the prices attached to its services. According to Genworth’s Cost of Care Survey for 2016, the average cost of staying in a private room at a nursing home for a year is $92, 378. This could increase immensely in the coming years. And as retirement seems to last longer than anticipated, there is not telling how much the prices will be then.
Not many people realize this but long term care needs may just be around the corner. 70% of individuals turning 65 can expect to need long term care services in the following years. Without forward thinking and enough time to consider the essentials for long term care planning, many individuals would end up facing the devastating consequences.
It is important to remember to be very thorough when it comes to planning and securing coverage for long term care. Do not make the mistake of diving into the first quotation presented.
Through the 1970s and 1980s, numerous nations received a creeping peg swapping scale framework, frequently as a major aspect of an enemy of expansion methodology. Review from Chapter 10 that a slithering peg includes fixing the conversion scale to a significant world money, for example, the dollar or the euro, or to a container of monetary forms that incorporate the nation of origin’s significant exchanging accomplices. The creeping some portion of the swapping scale includes customary—regularly day by day—downgrades of a fixed sum. Keeping up the peg requires the fiscal power to practice discipline in the making of new cash and is hostile to inflationary in that sense. Given the definition of the real rate as Rr Rn (P*NP), then if the change in P (domestic prices) is greater than the change in P* (foreign prices), the nominal rate, R n , must rise (devalue) in order to keep the real rate constant.What’s more, nations much of the time attempt to strengthen the counter swelling inclination of the slithering peg by deliberately debasing at a more slow pace than the contrast among home and outside expansion.
This makes genuine thankfulness in the swapping scale, and is planned to go about as a brake on residential swelling as outside products consistently got less expensive in genuine terms, constraining the cost builds that local makers had the option to force. The utilization of the swapping scale right now blended accomplishment in helping control swelling, yet in various cases it has prompted serious overvaluation of the genuine conversion scale and expanded the nation’s defenselessness to an emergency.
Numerous business analysts hold that the free development of capital is an attractive goal since it permits speculators to send their monetary capital any place the arrival is most noteworthy, which raises world government assistance by putting budgetary money to its most significant use. Simultaneously, capital portability permits nations to contribute more than is conceivable with their residential reserve funds alone, which again raises world government assistance when there are significant speculation ventures and inadequate investment funds to acknowledge them. Others, nonetheless, guarantee that the advantages of complete capital portability depend on hypothesis, however are never completely exhibited experimentally. What’s more, capital versatility creates extremely significant expenses as macroeconomic emergencies, and these costs must be balanced against any financial addition.
Through a great part of the twentieth century, nations made preparations for the issues of capital versatility by confining its development. This appears to infer that nations can keep capital from intersection their fringes, yet what may have been valid in 1970 is significantly more suspicious today. The development of rising securities exchanges and the execution of innovation to encourage capital exchanges have made both the impetus and the methods for speculators to send their cash-flow to another country.
On the other hand, they can underinvoice sends out so the detailed installments got are littler than the real installments, and the distinction can be contributed outside the nation without answering to specialists. While these systems are normal, and maybe false, by and large defilement as rewards is likewise an opportunities for getting cash out of the nation.
Regardless of whether these kinds of practices make controls on capital surges totally incapable is available to discuss, yet they plainly lessen the viability of capital controls. Limitations on capital inflows can’t stop an emergency once it starts, in any case. Since numerous emergencies incorporate a theoretical assault against the nation of origin money, some contend that an impermanent confinement on capital surges could help stop an emergency by misleadingly lessening the interest for remote trade. Amidst the Asian emergency, Malaysia followed this arrangement regardless of various alerts that it would undermine financial specialist trust in Malaysian approaches, cut them off from global capital markets, and harm the economy.
The Asian Crisis of 1997 and 1998
The Asian financial emergency started in Thailand in July 1997. From that point, it spread to various different nations, including Malaysia, the Philippines, Indonesia, and South Korea. The outward indications of the emergency were genuinely comparative across nations: cash theory and soak deteriorations, capital fl ight, and fi nancial and modern segment insolvencies.
Current Account Deficits and Financial Account Surpluses
The most seriously influenced nations all had huge exchange shortages. Table 12.1 shows current record shortfalls in 1996, the year prior to the emergency. In Thailand, where the emergency started, the present record shortage was almost 8 percent of GDP. The three nations in the base board of Table 12.1 all felt resonations from the emergency regardless of their little shortfalls or huge surpluses . Huge current record deficiencies fundamentally infer huge money related record surpluses, and the nations recorded in the top portion of Table 12.1 all accomplished enormous capital inflows. Remote financial specialists were more than ready to send their funding to East Asia, as the locale had arrived at the midpoint of around 5 percent development for each year in genuine GDP throughout the previous thirty years, and there was no motivation to accept that would change at any point in the near future. Besides, slow development in Japan and Europe during a significant part of the 1990s made numerous worldwide speculators scour the globe searching for better yields, and the steady and dynamic economies of Southeast Asia stood apart unmistakably.
Exchange Rate Policies
Swapping scale approaches in the area typically included pegging to the dollar, so that as the dollar acknowledged in the mid-1990s, it caused many trade rates to acknowledge alongside it, bringing about various critical cash misalignments. The pegged trade rates got increasingly hard to support, mostly on the grounds that they made it progressively hard for the pegged nations to send out. As per a few onlookers, this issue was exacerbated by China’s debasement of its fixed conversion scale in 1994 and the critical deterioration of the Japanese yen all through the time of dollar appreciation.
Financial Sector Problems
The downturn in trade incomes uncovered a few different shortcomings, incorporating those in administrative frameworks, corporate structures, and monetary frameworks. This can have huge focal points for little and medium-size endeavors, however as firms develop, the absence of divulgence and straightforwardness make it hard for outside banks to survey the microeconomic dangers of loaning. For instance, numerous banks encountered the sort of confuses between the developments of their benefits and liabilities depicted as a genuine weakness prior in the part.
Crisis and Contagion
The occasion that triggers an emergency is regularly moderately immaterial. For instance, a few experts accuse the decrease in Thailand’s fare profit on the downturn in costs for PC chips. Regardless, the enormous exchange irregularity and the mistake on send out incomes undermined speculator trust in Thailand’s capacity to keep its conversion scale pegged to the dollar. Individuals started to anticipate a downgrading and would not like to hold the Thai baht when it came. Any adjustment in financial specialist certainty could undermine the whole economy. How the Thai emergency spread universally is one of the less certain segments of the general emergency. One speculation is that Thailand filled in as a «wakeup call» for financial specialists to analyze all the more intently their possessions in different nations. Another theory is that the Thai downgrading made fares from a few neighboring nations less serious and constrained them to participate in serious debasements.
In any case, there was a disease component in the Thai emergency, and it before long spread to nations as distant as Brazil and Russia. Given their enormous exchange surpluses and their plentiful universal stores, Singapore and Taiwan had the option to concentrate on their residential economies instead of attempting to guard their monetary forms, in this way maintaining a strategic distance from downturns. Continuously quarter of 1999, each nation had come back to positive development. The quick recuperations appeared in Table 12.2 got most examiners off guard, the adaptability and major sufficiency of macroeconomic strategies all through East Asia encouraged quick recuperation. All things considered, Table 12.2 doesn’t recount to the entire story since neediness rose essentially all through the district. What’s more, many developing markets watched the emergency and concluded that the most ideal approach to forestall a comparable one in their own economy is to collect enormous supplies of worldwide save monetary standards.
Three issues in emergency the executives stay uncertain after this scene. The primary issue is a particular case of the difficulty of fixed trade rates. Should nations attempt to secure their local economies, or must they shield their monetary forms? For nations with huge exchange surpluses and sufficient global stores, protection of the residential economy through lower loan fees appears to be possible. The genuine inquiry applies to the five nations with huge current record shortages. The pundits charge that the IMF regarded the emergency as though it were equivalent to the Latin American obligation emergency of the 1980s, in which governments had huge spending deficiencies and high paces of expansion. In East Asia, governments were running surpluses or little shortages, so there was no compelling reason to incidentally get the economy with financing cost increments.
Protectors of the IMF contend that loan cost climbs were fundamental as a way to stop the slide in cash esteems. A subsequent issue identifies with the ethical peril of rescuing a bank or partnership. The counterargument is that «bailouts» are not so much bailouts in the full feeling of the word since they don’t shield financial specialists from misfortunes. Most financial specialists in East Asia saw sizable decreases in the estimations of their portfolios, so they have a lot of motivation to practice alert when loaning. A last uncertain issue is the issue of capital flight. Would it be able to be halted, in any event for the time being, with controls on capital surges? As noted in the past conversation on capital controls, Malaysia forced limitations on the outpouring of capital and Korea didn’t, yet both recuperated from the emergency generally rapidly.
Domestic Policies for Crisis Management
The instance of an emergency welcomed on by abrupt capital trip with regards to moderately steady and believable macroeconomic approaches is considerably increasingly hard to determine. Given that this sort of emergency may have various equilibria results, contingent upon the course taken by desires, there is an amazing contention for tending to the issue of a falling cash through financing cost climbs, deals of stores, and different activities that may help persuade speculators that the money is solid. Then again, high financing costs and different activities to protect the cash are probably going to increase liquidations and other contractionary powers that create during an emergency. Consequently, safeguarding a cash may drive a little downturn into an all out sadness. In the main kind, nonetheless, both financial and fiscal strategies are normally overextended, and the emergency is mostly a consequence of arrangements that are impractical and excessively expansionary.
As a result, this dispossesses financial and fiscal approaches as devices to stay away from the recessionary parts of the emergency, and the main way out is generally through a downturn. Governments face a difficulty right now, in that expansionary approaches remember a decrease for financing costs, which can cause a further devaluation in the household money. In the event that household firms have obligations that are named in dollars or another outside cash, a devaluation infers an unexpected increment in the size of their obligations and spreads extra insolvencies through the economy. As a result, this suggests financial and fiscal approaches are restricted if there is a global segment to the emergency. It likewise makes a distinct arrangement of decisions for taking care of the emergency. Either protect the cash with high financing costs and spread the recessionary impacts of the emergency, or shield the residential economy against the recessionary impacts of an emergency and increase the issues of a falling money. Asian Crisis of 1997 and 1998 turned on decisively this point. Obviously, if there was a simple, nonrecessionary approach to end an emergency, policymakers would utilize it.
Reform of the International Financial Architecture
The recurrence of global money related emergencies combined with their significant expenses has created a lot of enthusiasm for finding the correct approaches for staying away from an emergency and for taking care of one on the off chance that it starts. Taken overall, the conversation of new worldwide strategies for emergency shirking and the board is alluded to as improving the global money related engineering. Advancement and government-named bodies, for example, the International Financial Institutions Advisory Commission of the U.S. Congress. In the fallout of the emergency of 2007–2009, change is likewise a significant subject of conversation at universal gatherings of account pastors and nation pioneers. The first is the job of a universal loan specialist after all other options have run out and the guidelines overseeing its loaning rehearses. A subsequent issue is the sort of conditions that such a loan specialist may force on its borrowers.
A Lender of Last Resort
Review from Chapter 2 that a bank after all other options have run out is a wellspring of loanable assets after every single business wellspring of loaning have vanished. In a national economy, this job is normally filled by the national bank. In the global economy, it is filled by the IMF, regularly with the help of high-pay, mechanical economies, for example, Canada, France, Germany, Japan, and others. As a bank after all other options have run out, the IMF is regularly approached to mediate when nations arrive at an emergency point in their accounts and can’t make installment on their universal credits, or can’t change over their local cash into dollars or another remote money because of an inadequacy of worldwide stores. On the off chance that the proprietors of money related firms hazard a generous misfortune in case of monetary emergency, they are less inclined to face unreasonable challenge. The last issue about the principles for IMF credits is the size of the advance. Nations pay a membership, called a share , to join the IMF. The size of the share relies for the most part upon the size of the economy and its quality. The standard decides how much a nation can acquire in a «normal» emergency, just as what number of votes the nation has in setting IMF approach. By and large, it may not be conceivable to decide the distinction, however systemwide emergencies unquestionably can possibly force more prominent expenses. Consequently, there is an unmistakable justification for mediating with bigger entireties on the off chance that it will stop an emergency quicker. This is by all accounts a point on which most nations concur. At the 2009 gathering of the twenty biggest economies, called the G-20, there was consent to treble the assets accessible to the IMF from US $250 billion to US $750 billion, for an absolute increment of.
The subsequent issue encompassing the job of a loan specialist after all other options have run out, for example, the IMF is that of contingency. IMF contingency alludes to the progressions in financial strategy that obtaining countries are required to make so as to get IMF advances. Contingency regularly covers money related and monetary arrangements, conversion scale strategies, and auxiliary approaches influencing the budgetary part, global exchange, and open endeavors. The IMF makes its credits in tranches , or portions on the absolute advance, with each extra tranche of the advance subject to the finishing of a lot of change targets. Prior to the 1970s, IMF restriction concentrated essentially on revising the prompt wellspring of the issue that prompted an emergency, and it maintained a strategic distance from inclusion with fundamental monetary issues, for example, exchange strategy and privatization. This methodology was condemned as foolhardy, and it was concurred that the Fund ought to include itself past short-run monetary approach. New advance projects were created to give cash and specialized help to nations that required assistance in rebuilding their economies.
This move included the IMF in definitely more than emergency goals, as it took on a functioning job in aiding privatization, the structure of social approaches, exchange arrangement change, rural strategies, ecological approaches, and various different zones. The subsequent issue is the need to discover approaches to organize private segment association in the midst of emergency. Less advancement has been made on this issue than on the information scattering issue, and it keeps on being a genuine concern. At the point when a nation arrives at an emergency, the request by various private banks that they be paid first can make it increasingly hard to determine an emergency. Consequently, recommendations have been advanced for standstills , in which the IMF authoritatively perceives the requirement for a nation in emergency to stop intrigue and head reimbursements on its obligation incidentally.
In the consequence of the Asian Crisis, many change proposition were circled among scholastics, government authorities, and the staff of multilateral associations. The emergency drove home the focuses that universal budgetary streams had become drastically over the earlier decades, that many creating nations are presently dynamic members in world money, and that disease impacts can promptly spread an emergency starting with one nation or area then onto the next. 10 years after the Asian emergency started, the world was encompassed in an a lot more extensive and conceivably more profound emergency. However, as the Asian emergency blurred in memory, the earnestness for change decreased and very little had occurred when the emergency in the U.S. lodging market detonated in 2007. A generally steady world economy after 1998, and the ascent of issues, for example, psychological oppression, vitality costs, environmental change, and security, swarmed out the issue of global monetary change.
The Global Crisis of 2007 that emerged in the housing market of the United States in 2007, which adversely affected the entire US financial system and then other countries’ economies in a short time, and which is considered as one of the biggest crises in the world financial history, is the 21st century’s first financial crisis. In the United States, credit customers are divided into prime and subprime. Customers with high income and clean record are called prime. Customers with low income and not good at a pay off loan are called subprime. Therefore, another name for this crisis is the subprime crisis. When subprime loan borrowers are unable to repay their debts, the values of mortgage-backed securities issued as a result of securitization of receivables from subprime loans decreased. Taking into account possible future losses, the banks stopped lending to each other with the increase of insecurity and the entire credit market started to contract. The presence of investors from all over the world in the high-volume collateralized debt market has brought the crisis to other countries. The crisis, which first appeared in the US housing market, started to affect the economies of all countries in many ways in a short time and turned into a global financial crisis. In parallel with this, many countries have shrunk their economy and serious economic and social problems have emerged.
Causes of the 2007 Subprime Credit Crisis
The Global Crisis of 2007 Problems that started in the US housing market in mid 2007 from enlarged and developed economies to developing countries has gained a global dimension. Causes of the crisis, liquidity abundance and as a result, sloppy loans, excessive securitization, lack of transparency, ineffectiveness of rating agencies, and as the delay of intervention of regulatory and supervisory agencies can be listed. Global financial crisis bank failures in the financial system reflected in the real sector after consolidations and nationalizations has lowered global growth rates, caused inflationary effects caused the requests for regulation to be spoken louder.
In the US, the money related obligation that began with the absence of lodging credits and swelling issues keep on developing. Of the secondary market in housing loans, state control of Freddie Mac and Fannie Mae created for the development of Lehman Brothers. USA Bankruptcy Filed for bankruptcy under Article 11 of the Law, Merrill Lynch was sold to the Bank of America at a very low price and the huge insurance company FED (US Central Bank) to continue AIG operations had to use a significant amount of credit. Britain, Europe and the crisis feeling in developing countries and gaining a global dimension followed by a bailout bill of about 700 billion dollars in the USA. It was approved by passing through the assembly. This financial crisis is similar to the old ones in some ways. For example, in September 1998, the New York FED (US Central Bank New York Unit) to save LTCM, one of the country’s largest hedge funds an initiative involving fourteen major commercial banks and securities companies launched. They acquired 90 percent of LTCM, providing a total of $ 3.6 billion in the capital. However, as a result of the recent mortgage crisis, the USA government’s interest rate cuts, bank merger operations and the latest seizure of mortgage institutions is almost a “intrusive market”. It shows that it has become “normal”.
These developments are the USA and other advanced developing the financial system of economies, developing revisiting the world’s capital movements policies and another mentality of the world financial system and another it will lead to its redesign. In developed countries, and especially in the USA, almost every separate financial institution and the financial instrument has been created for the function. This institution and tools have interrelated and intricate relationships. For example, interest rate derivative many financial markets, from forward swap transactions to floating swaps offers vehicle. In understanding this complex structure of financial instruments there is a major challenge. Changing everyday for ordinary investors it is not possible to follow new and different financial instruments. Especially with a serious transparency problem, especially when it is desired not to be understood common. Another deficiency in transparency is what is called asymmetric information. In this case, information is given to investors, companies and other actors at different speeds and reach in formats. For example, “insider trading” is a kind of asymmetrical information. Even if such information is prevented by legal sanctions, it constitutes a crime. It is very easy to overcome the problem of asymmetric informing. Empirical research reverses between financial crisis and lack of transparency shows that there is a directional relationship. 6 Less financial as transparency increases. The crisis occurs the most important problem with rating agencies is a conflict of interest. In understanding this mind boggling structure of monetary instruments there is a significant test. When this is the case rating agencies’ ability to make objective evaluations it decreases. Banks that design financial institutions for rating agencies and information about the underlying asset as much as the buyers of the instrumentcan be another problem is that rating agencies only is grading the risk. However, the liquidity risk and the risk of changing the rating also needs to be measured. Rating agencies are very effective before the last financial crisis didn’t work. However, after the financial crisis started, credit ratings has been reduced from the third quarter of 2007 to the second quarter of 2008, 1.9 by two major rating agencies over the past year. The rating of trillion-dollar mortgage-backed securities has been reduced.
The Effect of 2007 Subprime Credit Crisis on Global Financial Crisis
The subprime credit crisis, which started in the USA, has been transformed into a global financial crisis, and investors from all over the world take part in the secured debt market. In the first place, investors in North America, Europe, Australia and Asia were affected by the credit crisis. Crisis; It turned into an economic crisis with the negative impact of firms on their balance sheets and households. The losses caused by the crisis in the world economy are estimated to be 400 billion dollars as of January 2008. In April 2008, the International Monetary Fund (IMF) announced that the total cost could reach $ 945 billion. Three state banks (Bank of China, China Construction Bank and Industrial and Commercial Bank of China) in China, which hold $ 8.8 billion of subprime securities, faced significant losses. Sharp depreciation of the country’s stock exchanges also revealed the extent of The Global Crisis of 2007
Although the world economy is recorded as 65 trillion dollars by the end of 2007 according to purchasing power parity, 14 trillion dollars of the goods and services produced in the same year were produced in the USA with a population exceeding 300 million. The size of the 2007 budget in the USA, which constitutes 21% of the world economy, was 2 trillion 731 billion dollars. The USA alone accounts for about 16% of world imports. It is inevitable that the crisis experienced in a country with such a big weight in the world economy will affect the global markets and country economies.
The contraction of consumption in the USA in 2007 caused the global economy to stagnate. Although the financial crisis started in the developed countries as of the second half of 2007, it also started to affect the developing countries in 2008. Fiscal policies aiming to increase the reserve assets, decrease the public net debt stock and limit the borrowing in foreign currency within the country lie behind the developing countries’ late exposure to the effects of the crisis. With the reflection of the crisis on developing countries, a significant part of these countries experienced depreciation in their stock exchanges, national currency depreciated, risk premiums increased, foreign capital flows and bank borrowings decreased. Global banks and regulatory authorities could not see the risks or take the necessary measures in a timely manner. After the crisis arose, governments began to announce rescue packages. Since the second quarter of 2008, negative growth rates in the economies of developed countries have started to be seen frequently. Economic growth has slowed in 94 of the 116 developing countries in 2008. In this period, international investments decreased, global trade contracted and the credit market shrank.
Results of the Global Financial Crisis
While the rise in housing prices is one of the causes of the global financial crisis, the fall in housing prices is among the results of this crisis. As some of the housing loans have not returned, the housing market has entered the vicious circle and there have been significant declines in housing prices since the beginning of 2007 in the USA.Due to the reflection of the financial crisis on the real economy, growth rates decreased both in the developed world such as the USA and Europe and in the developing countries.
The global crisis has also affected unemployment rates significantly. Especially in the USA and developed economies, an upward trend is observed the rise in inflation in 2007 and 2008 was not only caused by the financial crisis. In this period, rises in oil and food prices caused a significant inflationary effect. Especially in developing countries, where energy demand is increasing rapidly, inflation rates have increased rapidly from the third quarter of 2009, the exit from the global economic crisis has started to a large extent. Comprehensive fiscal policies and economic measures were effective in the exit from the crisis. Monetary and fiscal policies, which started to be implemented in this period, reduced the risk of the international systemic crisis, enabled the economic contraction to slow down and eased the pressure on the financial markets. The commonly used low interest policy has accelerated global capital movements and positively affected the exchanges. Capital supports and measures to increase aggregate demand constituted the main axis of the measures taken in the same period. In parallel with this, the US economy, which is the locomotive of the world economy, grew by 2.2% in the third quarter of 2009 after shrinking four consecutive quarters. According to the data of the World Trade Organization, the shrinkage in the trade volume left its place to increase as of the second quarter of 2009. Economic performance of developing countries, especially Asian economies, increased the rate of economic recovery in 2009.
Despite all these positive developments, the global economy contracted by 0.8% in 2009. The global economic recovery continued in 2010. While strong economic growth performances have been observed in developing countries, growth rates in developed countries have been relatively weak. Public expenditures of developed countries increased, economic deterioration reduced public revenues. The public debt stock problem in the related countries increased the risks in the financial markets that started to normalize after the crisis. As a result of these developments, the recovery rate of the global economy decreased in the last months of 2010.