Global Financial Crisis: Impacts and Responses

The assignment delves into the multifaceted impacts of the Global Financial Crisis (2008) across diverse domains. It examines the crisis's effects on banking systems, corporate investments, equity markets, and global economic integration. Furthermore, it explores the social consequences, particularly concerning poverty and sustainable development, and analyzes various policy responses implemented to mitigate the crisis's adverse effects.

Running head: GLOBAL FINANCIAL CRISIS
Global Financial Crisis
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Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Probable causes of the financial crisis.........................................................................................2
Difference in the impact of financial crisis on Nepal and other countries..................................5
Impact of financial crisis on share market and the housing industry..........................................8
Conclusion and recommendation....................................................................................................9
Reference.......................................................................................................................................10

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Introduction
Global financial crisis or the GFC refers to the most significant economic failure since
the economic depression of 1929. The main cause identified for this financial disaster is the
deregulation in the financial sector. Global financial crisis gave rise to the recessions which
further resulted in unemployment and depreciation of house prices. The outbreak of GFC is
believed to have taken place back in the year 2007 as a result of the liquidity deficit. This in
turn has been the outcome of the decreasing confidence of the investors in the US while putting
value in the subprime mortgages (Ojo 2016).
The situation of the financial crisis became worse because of the high unpredictability
and the downfall in the worldwide stock market in September 2008. At that point of time the
GFC shot up due to the housing failure in the US market which gave rise to a worldwide
disruption of allowance flow from the year 2008-09 by 6%. Therefore it can be stated that
according to the updated version of international monetary fund or IMF the finance of both the
developing and the developed countries was absorbed by the economic crisis which resulted in
the sinking of the worldwide output level to 2.2% in the year 2009. Nepal is a country which is
supposed to have not been victim of direct impact of the GFC (Attig et al. 2016).
Discussion
Probable causes of the financial crisis
The list given below can be considered as the possible causes that might have led to the
occurrence of the global financial crisis-

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Global saving glut- ongoing current account deficit in the US and the global saving glut
could be the primary reasons behind the excessive increase in price of the assets. Most of the
countries were facing moderate deficit in the current account and trade before the disaster took
place but there was a substantial swell in saving and the external borrowings were lessened to
prevent lending from the US. The countries which were on the verge of development started
saving money instead of buying in the world market. This turnaround led to the production of the
global saving glut. Whereas the countries which were already developed and advanced started to
look out for investment causing an increase demand which resulted in price enhancement of the
assets in the US that not only included housing but also stock market (Balakrishnan et al. 2016).
Prices of housing- A considerable fall in the prices of housing was another significant
cause in the history of the global financial crisis. In the time period of 1996- 2006, the housing
prices increased as the rate of interest was reduced and there was stress of the new economy. In
the middle of 2006 and February 2009, there was reduction in the housing prices and it was
regarded as the foremost reduction from 1987. The decrease took place because mortgage
lending was mostly aimed at the richer population and was not used to weigh down the
increasing burden of debt of the huge mortgage.

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Fig: Explosion of housing price
Source: imf.org 2018
Increase in the rate of interest and the subprime lending- there was further increase in the
housing prices due to the increase in the tax standards of lending money and much less rate of
interest was associated with the saving glut. The borrowers who took loans were mostly the
subprime lender and that is the reason why the conventional standards were not met as a result of
the deprived recognition value. With the increase in the rate of interest borrowing became more
expensive than ever. In addition to that there was a severe impact on the housing prices too
because of the prices moving from low to high in terms of market rates (Dungey and Gajurel
2014).
Credit explosion- credit explosion or expansion is the role played up for shooting the
financial crisis. Credit access took place at a faster rate that helped in the expansion of the real
estate market in various countries such as Spain, UK, Ireland, Iceland and many other countries
of Europe. Moreover there was recurring instability within the financial structure due to the clash
in the swift boom in credit. Debts to housing ascended hurriedly in the US after the year 2000
but there was not much growth in credit. The three factors which contributed significantly in the
explosion of housing debts are fiscal innovation, increase in the financing of mortgage and a low
rate of interest (Bauer and Thant 2015).
Probability of financial crisis being repeated- according to the theory of business cycle,
there is a probability that the financial crisis can happen again. The reason behind the repetition
of the global financial crisis is that it is still in the booming stage and there might be a chance
that the economy will depreciate again and that will end up in dejection.

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Fig: theory of business cycle
Source: (Dungey and Gajurel 2014).
Difference in the impact of financial crisis on Nepal and other countries
Financial sector effects- strength of fiscal sector, macroeconomic performances and the
publicity to unknown assets market is highly distinguishable from one country to another. The
negative effect of foreign direct investment or FDI and the cash flow has taken a toll on the
economy of the developing countries such as India. The biggest current and financial deficiency
in the account had a major impact on the economy of Sri Lanka with respect to inflow of cash
from the external environment and an increase in the bond between the countries. Unfavorable
crash in the global economy was also felt in Nepal as they were among the countries that were
rising from low growth situation (Albertazzi and Bottero 2014). Decrease in the international
price for food and fuel, explosion at the extreme level and the financial determiners such as low

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capital sufficiency and the non-performance of loans have played a role in leading towards a
weak financial sector of Nepal.
Impact of remittance- Global financial crisis has led to the decline in the flow of payment
in the year 2008-09 by 6% and the countries that were among the least affected are those in the
region of Asia Pacific at 2% in comparison to the downfall in regions of Latin America, Middle
East, North Asia, sub Saharan Africa, Caribbean and Central Asia.
Fig: Remittance inflow
Source: (Vazquez and Federico 2015)

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Fig: Increase in remittance flow to Nepal
Source: (lib.icimod.org 2018)
On the contrary, Nepal is an exceptional case as it did not face the remittance inflow. It
started decreasing from the year 1998 to 2010. It was regarded as the fifth largest receiver of
payment in terms of the international share of GDP or Gross Domestic Product.
Foreign exchange reserve- the IT sector of the new and developing economies faced
significant impact due to the financial crisis as there was rising problems with the fund that led to
huge amount of loss in the foreign exchange. In order to decrease the total funding requirements
of the businessmen it is an absolute necessity to reduce the funding of outsourced activities of the
combining economies. The foreign exchange reserve of the banking system in Nepal during the
financial crisis depreciated due to the deceleration of interest income and the payment of cash.
The development of the foreign exchange researves with respect to 17.3% to US$ 3.64 billion in
the year 2008-09 to US$ 3.1 billion in the year 2007-08 (Abraham and Rajan 2014).
Impact on macroeconomic balances- the tenure of trade stocks gave way to the worsening
of macroeconomic balances of the countries in South Asia. In the last few months, in and after

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the financial crisis the prices of the commodity were decreasing. The slowing down of the
payment and the earning from the exports has affected the current account. As the prices have
lowered there is a chance that the revenue earnings will also decrease.
Import- the lowering trend in the price of commodity especially in the prices of food and
fuel is an outstanding feature in the import business. With further decrease in the price the reason
can be taken as the depression in OECD countries and the south Asian countries will have a
positive impact on them.
Impact of financial crisis on share market and the housing industry
Impact on the housing industry- it can be reflected from the real economy that the
decreasing impact of the economic sector crisis are much considerable and has a more direct
characteristic. But the global crisis took a very big toll on the housing industry which is
elaborated below.
Investment- the combination of the increase in the non performance of assets in the local
and domestic banks allowing with the slowing down of the international funding are the main
threats to the growth as it negatively impacts the investment. It will result on the lowering of
profits for the particular companies that are responsible for exporting market commodities. With
the availability of the domestic financing for the purpose of capital investment was lessened and
there was further reduction in the domestic venture rate. Due to growth, development and
investment in the countries of South Asia was lowered due to the sluggish international capital
and earning of exports(Boychuk et al. 2012).
Impact of the financial crisis on the share market- there was an increase in the degree of
instability due to financial crisis and it is said that volatility is different from one financial market

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to another as per the rise in stock severity and also in terms of magnitude. Financial crisis of US
in the year 2009 as a result of the collapse in the subprime mortgage market made way to
liquidity crisis and collapse in the stock market.
The financial condition of countries such as Nepal is not closely related to the
international financial system and they do not have the negative impact of financial crisis in the
first place. Te share market and the investment market of Nepal is not directly related with the
global investment market and it has series of reactions against declining exports, falling
tourisms, additional burden of debt and the failure of international aid had worsened the trade
deficiency of the country (Bénétrix et al. 2015).
Conclusion and recommendation
This report has dealt with the explanation of the causes and the impact of the global
financial crisis on various countries with special reference to Nepal. It has been stated in the
course of this report that the global financial crisis had a major impact in the seconds and third
series with respect to cash payment, foreign exchange reserves, tourism and commodity prices. It
also created a catastrophic effect on the economic situation of Nepal pertaining to non-
investment in the sectors of production and unemployment. But the economic condition of Nepal
was not directly impacted by the global financial crisis. There was a declining impact on the
growth rate of the country due to fall in the international demand for the products manufactured
in Nepal.
Moreover the stock market of different countries also collapsed which restricted the
growth of the stock market. Therefore it can be concluded from this discussion that the global
financial crisis influenced the economic structure of a number of countries but also hampered

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many small and medium organizations in addition to huge investment. Both the developed and
the developing countries experienced the cascading effect of the economic crisis in terms of the
reduction in the use of large debt and fiscal leverage of the organizations.

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