Spain's Economic Crisis: Why Recovery Took So Long

This assignment content discusses the Spanish economic crisis, with several academic papers and online sources providing insights into why the recovery has taken so long. The papers explore various factors such as institutional factors, financial structure, push and pull factors of capital flows, flight home effect, governance of financial regulation, and micro and macro determinants of non-performing loans. Additionally, there are online sources that provide a sentiment-based portfolio theory perspective on investor sentiment during the financial crisis and also look back at the 1987 stock market crash as an early warning sign of the Great Recession. The overall goal is to understand the complexities of the Spanish economic crisis and its slow recovery.

Portfolio the main causes of the
economic crisis

Table of Contents
INTRODUCTION...........................................................................................................................3
Q.1 Identify and analyse the main causes of the economic crisis 2007-2008.............................3
Q.2 Critically evaluate the effectiveness of tools used for forecasting events and predicting
crises in........................................................................................................................................5
the business environment...........................................................................................................5
Q.3 Discuss in terms of strategic crisis management theory, what organisations need to do
prior,............................................................................................................................................7
during, and after such an event to survive and perhaps thrive....................................................7
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11

INTRODUCTION
Global financial crises having a great impact on the developed and developing countries
and its economic growth. It can create a serious situation such as uncertainty in inflation, interest
rate, increase in unemployment, decrease in the demand and slowdown the GDP of the nations.
All these elements have an adverse impact on the business and its future growth rate (Fratzscher,
2012). A financial crises is often associated with a panic on the financial institutions such as
banks where investor sell off their assets or withdrew their money form bank accounts with the
expectation that the value of assets will drop. In the historical aspects of economic crises was
worst in 1929 which was the economic disaster for the world. The present report is related with
the 2008 economic crises. In 2007-08 the global economy faced one of the most dangerous crises
after Great Depression 1929. the purpose of this report is to understand the causes of last
economic depression and determine the forecasting tools and techniques which can predicting
such crises in a business environment (Claessens and et. al., 2010).
Q.1 Identify and analyse the main causes of the economic crisis 2007-2008
In 2007-08, the world experienced a major financial crises which one of the most serious
recession after Great Depression 1929. Both the financial crises and slowdown the United States
economy affects all other countries which can transform a global crises. In mid 2008. Lehman
Brothers which is one of the leading investment bank failed and companies laid off large number
of staff due to recession. This is actually perfect storm which has been brewing for now and
finally reached its breakdown point (Carballo-Cruz, 2011).
 This is one of the major cause which comprises vie various elements. The new credit
lines can increase the flow of money and slowed financial growth. It has been hurt
various investors, multinational companies and banks. The another factor was lower rate
credit which promote individuals ton buy houses. Such system create too much money in
the market where people to spend that money (Milesi-Ferretti and Tille, 2011).
Unluckily, they wanted to buy the same thing which can leads to increase demand and
increase inflation. Large number of investors give billions of dollars of debt to purchase
organizations which can not transform in term of value what they expected. Apart from
that, at the same time the prices of oil gone higher which can leads to increase
unemployment rate.

 Credit is a tool which are used by all economies in order to maintain its growth and
employment in the market. It is used to increase the demand for various products such as
car, houses and other investment products in order to create good return from its in the
near future (Cour-Thimann and Winkler, 2012). But in last decade credit got out of
control in the US economy. Mortgage companies identified who got loans, then transfer
responsibilities for those loans to another organizations through mortgage backed
securities. Brokers who responsible for approved such loans by packaging these bad
mortgages with other mortgages resale them in terms of investment. Large number of
people took loans in the hope that they could earn profit out of them and purchase houses
as a investment which was not good for them (Masini and Menichetti, 2012).
 Due to lower interest rate can leads to increase the credit which can leads to increase the
demand of houses. The housing slump having a great on impact in economy. Changing in
mortgage rates are effect persons and investors through which mortgages are no longer be
affordable by them. Further, as a result it can reduce rate of mortgage backed securities
and various banks and financial investors are loosing money. Prices of houses are tends
to decrease and growth rate of new building has been reduce through this effective
factor. Decreasing housing prices able to create various complications like; value of new
homes are less then the mortgage. Affordable rates are accepted by them but unaffordable
going to reduce their profit efficiency (Bekaert and et. al., 2014).
 Some massive damages are affected to banks and financial institution as they are
merged with other institution in order to come out from great looses and easily bought
out. Some banks are still working through receive benefits from government which are
framed in their interest and they are lucky enough. Greater number of institutions are
unlucky as they are crashed. Mergers of different banks is the best possible solution
which remove conflicts and simply bought out (Giannetti and Laeven, 2012).
 Lots of banks and financial institutions are facing loses from risky mortgage
backed security which no longer be affordable by them. If present loans of banks are not
present positive view of cash flow then they cannot loan more money to persons and
other institutions. The biggest solution for solve this problem banks needs to lend more
money to financial institutions and other organizations. It is basic advantage for them to
recover their position and enhance their profits as well. Opportunities are provide them in

order to solve problem of risky mortgage securities and meet current economic condition
(Beltratti and Stulz, 2012).
Q.2 Critically evaluate the effectiveness of tools used for forecasting events and predicting crises
in
the business environment
It is essential for business organizations that to determine the potential risk and forecast the risk
and its impact on the business. There are various tools and techniques which can be used in order
to overcome potential impact from any risk. These are two types of methods as given below:
Quantitative method:
Trend extrapolation Approach: This techniques is most widely used in the forecasting and
predicting the economic crises. This approach is based on mathematical concept to extrapolate to
the future event. The assumption of all these techniques is that the forces responsible for creating
the past, will continue to operate in the near future (Wagner, 2010). This is sometimes a valid
assumption for the short term forecasting. It can be fail in the medium and long term forecasting
due various other factors. This concept is working when environmental factors are stable in the
determination of the future event. There are different quantitative model for the for predicting
trends and economic cycles. Selecting a suitable approach for the particular forecasting
application can depends on the historical information and data. The research of historical
information is called exploratory analysis.
Simulation Approach: Simulation approach includes apply analogs to model complex systems.
These analogs can take on different forms. It is equation to forecasting an economic measure
would be a mathematical analog. There are various analog such as S-curve, multivariate
statistical techniques, Multiple regression, Gaming analogs etc. These approach can be used to
model complex systems which can involved relationships between more than two variables.
Multiple regression analysis is one of the most common technique (Sabato, 2010). Unlike trend
extrapolation tools, which only consider at the history of the factors being forecast, multiple
regression approach consider at the relationship between the factors being forecast and two or
more other variables.
Advantages of quantitative methods
 At the time of analysing the data can be manipulated which can not create a clear picture
of forecasting.

 There are various uncertain events which can not covered in calculation and evaluation.
Qualitative method
Cross impact Approach: This is a qualitative approach which related with the relationships often
exist between future events and developments that are not exposed by univariate predicting tools.
The cross-impact matrix concept recognizes that the occurrence of an event can, in turn, effect
the likelihoods of other events. The researchers can assign probabilities for the likelihood future
event and evaluate effectively (Messai and Jouini, 2013). Probabilities are assigned to reflect the
likelihood of an event in the presence and absence of other events. The resultant relationship
structure can be used to examine the relationships of the elements to each other, and within the
overall system. The advantage of this tool is that it forces forecasters and policy-makers to look
at the relationships between system elements, rather than viewing any factors as working
independently of the others.
Combining Approach: It seems clear that no forecasting tools is appropriate for all situations and
conditions. There is substantial evidence to demonstrate that combining individual forecasts
produces gains in forecasting accuracy. There is also evidence that adding quantitative forecasts
to qualitative forecasts reduces accuracy (Levine, 2012). Research has not yet revealed the
conditions or methods for the optimal combinations of forecasts. Judgemental forecasting usually
involves combining forecasts from more than one source. Informed forecasting begins with a set
of key assumptions and then uses a combination of historical data and expert opinions. Involved
forecasting seeks the opinions of all those directly affected by the forecast. These techniques
generally produce higher quality forecasts than can be attained from a single source.
Advantages of Qualitative methods:
 It is less expensive and time saving approach as compare to other tools of forecasting.
 Factors can be discussed in detailed between the opinion of experts and policy makers.
 The data that is collected comes from a few cases or test subjects and cannot be universal
to a larger population. The results or findings can be transferred to another setting
(Syllignakis and Kouretas, 2011).

Q.3 Discuss in terms of strategic crisis management theory, what organisations need to do prior,
during, and after such an event to survive and perhaps thrive.
This is important for the business organisations to make a pre plan for their upcoming crises. It is
natural that to make a effective crises management plan which can help to save them from
potential financial risk (Ongore and Kusa, 2013). There are various models which can be used to
overcome or manage their financial crises more effectively as given below:
Gonzalez-Herrero and Pratt approach:
This method includes three stages which manage and save potential lose in their business due to
future economic disaster:
Diagnosis of crises: This is the first stage where companies are required to detect and identify
early indications of the crises. Therefore, leader and managers of the business units to feel these
indications and warning signals. There are various warning element which can indicate the future
financial crises as given below:
Uncertainty in oil prices: This is one of the major indicator which can help to analyses the
potential financial crises. The main reason is that there are large number of companies are
operating their business in this sector and all industries can not operate without oil. Therefore,
fluctuation in the oil prices can impact on the business. When look back in 2008, oil prices are
under 40 dollars per barrel (Fratzscher, 2012).
Political situation: This is another significant signal which are related with the political situation.
It can be positive relation between political stability and economic stability. If there are
government stable in the countries which can promote a sound economic model and consistent
growth. On the other hand lack of government stability can increase the chances of financial
disaster. For example, in the present time there are various countries such as Greece which are
facing both crises which may impact on the growth and development of other part of the world
specially for the European nations (Claessens and et. al., 2010).
Current account and fiscal deficit: The main role of a government is to provide strong economic
policy and implementation in order to promote growth and development in the copuntry.
Therefore, they required that to use all financial resources effectively which can help to make
competitive at the global level. A mismanagement of economic policy can be hurt the economic
situation which can leads to increase the fiscal deficit which is not good for an ideal economy.

Level of inflation: It is important for policy makers to manage inflation rate in the economy. In
order to control inflation they can make changes in to the monetary policy and fiscal policy.
Therefore, low inflation and higher inflation both are not good for the economy. They required to
balanced according to the other related factors (Carballo-Cruz, 2011).
Level of public debt: This is another indicator which is related with the public debt. In the
situation of fiscal deficit government take a loan form internal and external financial institution
in order to arrange their capital. Is the public debt is too high it can leads to damage the economy
which is not good for them. Therefore, various developing countries are make balanced between
their debts and reserves.
Planning:This is next stage after the crises being detected. In this phase, policy makers are
required that to make planning in order to prevent such crises on their business. For this, a
business unit can also take suggestion from experts which can help to overcome their risk in the
near future. For this they can set the target and make their strategies accordingly. It required an
effective decision making and make sure that their fact and figures are correct and based on it
they can make their decisions (Milesi-Ferretti and Tille, 2011).
Adjusting to change: The higher authorities are required that to make changes according to the
situations. It is essential that to evaluate and analyse the factors which can let tom the potential
crises in the future. Mistakes should not be repeated and new plans and processes must be
incorporated in the system.
Q.4 Discuss the leadership lessons that senior management should take away from
the consequences of the financial crisis.
Since 2007-08 economic crises, leadership and management practices are required to
change specially in the financial institution. It help to create a new leadership style which is
associated with the changes in the administration and organisational and governance structure
(Investor sentiment and the financial crisis: a sentiment-based portfolio theory perspective,
2017). It not clear that what kind of norms and values can be used in the new sector. Between
1970s to 2001, business leaders as a role model or hero was a celebrated approach. For example,
Steve jobs at apple Inc. and Sir John Brown of BP and transform the business organisation
through their performance. But after that the new approach come in to practices which is known
as team based model. In this model a financial institution can divide the roles and responsibilities
to their different leaders and manager according to their expertise. For example, banking

institution can divide roles in to planning, administration, crises management etc. it can help to
make changes and less impact on the business performance from a financial crises. After the
2008 crises, corporation and its management will revise their formal governance structure,
changes in their team composition and consider the personality, skills and capabilities of the
peoples placed in to the higher position (25 Years Later: In the Crash of 1987, the Seeds of the
Great Recession, 2017). They can use various motivation tools and techniques in order to inspire
their staff and also punish for their poor performance. On the other hand other business
organisations will change their concept and focused on the public responsibilities. They think
that trust and relationship will become the selling tools for them. Banking institution or general
business organisations can make a sound relationship with their customers can help to sustain in
the market this approach is close to the stakeholder centric approach.
Various business organisation will need to find the appropriate structure and system which can
be formal or informal in order to retain efficiency and performance. The leadership team can
help to meet challenges due to its diverse personalities and skills. They can work together set
new targets and future directions and focusing on the day to day operations which can help to
attain their target in a effective manner. They required to make a effective governance structure
which can help to improve their overall performance (Inquiry into Greece’s Financial Crisis,
2017). Today only 25 percent of CEO's come from outside. They need to use innovations and
technology which can meet challenges at the different level within the organisation. They also
required to use various tools and techniques which can control the financial resources. The
successful leaders are those who transformed business organisation and try to make unique from
others. They can set the organisational mission and objectives and future directions, not only the
strategies and plan. They required to focused on the company mission and give strategies to the
executive level. The best example Barclays PLC which is more focused on the day to day
operations and set the target on the monthly basis. It having a risk in the function but also in the
governance roles in the different areas. It has avoided many of the problems facing other banks.
CONCLUSION
As per the above mentioned report it has been concluded about the global economic
crises 2008 and its impact on the business organisations. The report discussed about the major
causes of this crises too much credit in the US economy, declined the demand of houses and the

failure of one of the leading investment institution known as Lehman Brothers. The report also
explained about the different types of tools and techniques which can help to forecast such crises.
It can included quantitative and qualitative approach and its pros and cons for the business
organisation. Further, concluded that strategic crises management models which can help to
overcome its impact. In the end it tell about the leadership lessons for the top management of the
business organisation.

REFERENCES
Journals and books
Bekaert, G., and et. al., 2014. The global crisis and equity market contagion. The Journal of
Finance. 69(6). pp.2597-2649.
Beltratti, A. and Stulz, R.M., 2012. The credit crisis around the globe: Why did some banks
perform better. Journal of Financial Economics. 105(1). pp.1-17.
Carballo-Cruz, F., 2011. Causes and consequences of the Spanish economic crisis: Why the
recovery is taken so long. Panoeconomicus. 58(3). pp.309-328.
Claessens, S., and et. al., 2010. Cross-country experiences and policy implications from the
global financial crisis. Economic Policy. 25(62). pp.267-293.
Cour-Thimann, P. and Winkler, B., 2012. The ECB’s non-standard monetary policy measures:
the role of institutional factors and financial structure. Oxford Review of Economic
Policy. 28(4). pp.765-803.
Fratzscher, M., 2012. Capital flows, push versus pull factors and the global financial crisis.
Journal of International Economics. 88(2). pp.341-356.
Giannetti, M. and Laeven, L., 2012. The flight home effect: Evidence from the syndicated loan
market during financial crises. Journal of Financial Economics. 104(1). pp.23-43.
Levine, R., 2012. The governance of financial regulation: reform lessons from the recent crisis.
International Review of Finance. 12(1). pp.39-56.
Masini, A. and Menichetti, E., 2012. The impact of behavioural factors in the renewable energy
investment decision making process: Conceptual framework and empirical findings.
Energy Policy. 40. pp.28-38.
Messai, A.S. and Jouini, F., 2013. Micro and macro determinants of non-performing loans.
International Journal of Economics and Financial Issues. 3(4). p.852.
Milesi-Ferretti, G.M. and Tille, C., 2011. The great retrenchment: international capital flows
during the global financial crisis. Economic Policy. 26(66). pp.289-346.
Ongore, V.O. and Kusa, G.B., 2013. Determinants of financial performance of commercial
banks in Kenya. International Journal of Economics and Financial Issues. 3(1). p.237.
Sabato, G., 2010. Financial crisis: where did risk management fail?. International review of
applied financial issues and economics. (2). pp.315-327.
Syllignakis, M.N. and Kouretas, G.P., 2011. Dynamic correlation analysis of financial
contagion: Evidence from the Central and Eastern European markets. International
Review of Economics & Finance. 20(4). pp.717-732.
Wagner, W., 2010. Diversification at financial institutions and systemic crises. Journal of
Financial Intermediation. 19(3). pp.373-386.
Online
Investor sentiment and the financial crisis: a sentiment-based portfolio theory perspective. 2017.
[Online]. Available through;
<http://www.tandfonline.com/doi/abs/10.1080/00036846.2014.978078>. [Accessed on 17th
March 2017].

25 Years Later: In the Crash of 1987, the Seeds of the Great Recession. 2017. [Online].
Available through; <http://business.time.com/2012/10/22/25-years-later-in-the-crash-of-1987-
the-seeds-of-the-great-recession/>. [Accessed on 17th March 2017].
Inquiry into Greece’s Financial Crisis. 2017. [Online]. Available through;
<http://portfolio.cept.ac.in/freedom-or-death/>. [Accessed on 17th March 2017].