Economics

International Financial Crisis

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INTERNATIONAL FINANCIAL CRISIS

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.

international crisis



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.



Economic Imbalances

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.

Hello, I have been working as an investment consultant and author for more than 20 years. I love what I do and I have enriched everyone around me. A lot of money is not important, the main thing is how you use the money.

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