Global Financial Crisis Analysis

The given report provides an in-depth analysis of the 2007 global financial crisis, highlighting various causes such as wrong grading by rating agencies, inadequate monetary system, and irregular policies. The assignment explains the significant impact of the crisis on different countries, including reduced growth rates, low GDP rates, unemployment, high recession, reduced trade and exports, and low FDI flows. It also discusses regulations provided by IMF to overcome adverse effects and promote effective banking industry regulations.

Global Financial Crisis

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK...............................................................................................................................................1
1. Types and Possible Causes of Global Financial Crisis...........................................................1
2. Conditions which contribute in repeating GFC again in the future........................................3
3. Impact of GFC on the economies of different countries.........................................................4
4. Reforms provided by IMF.......................................................................................................5
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Global financial crisis (GFC) is the situation of economic difficulty which is faced by the
markets and consumers across world. It is initiated in July 2007 due to the loss of confidence of
US investors on high risk mortgages. This caused liquidity problems in front of banks. GFC has
become worst after the collapse of Lehman brothers in September, 2008. Due to the effect of
GFC, borrowers faced the situation of negative equity and unable to pay their loans. This had a
negative effect on the values of homes and land as well (Chaisty and Whitefield, 2012).
In the present report, possible causes of Global Financial Crisis, impact of GFC on
economies of different nations and measures provided by IMF to overcome from issues of GFC
are explained.
TASK
1. Types and Possible Causes of Global Financial Crisis
Global financial crisis is the situation which arises in July 2007 due to collapse of
financial market of US because of crisis started in subprime mortgage market. This happened
because of the loss of confidence of investors on transactions of banks. Another major reason
behind GFC is the mishap of Lehman Brothers due to excessive risk taking in providence of their
functions in 2008 (Global Financial Crisis. 2018.). It is the worst situation which is faced by
world after depression of 1930. This had a huge impact on the world's economy as due effect of
GFC, financial markets got disturbed which in turn affected the prices of assets. It created the
situation of insolvency among debtors and intermediaries as well as affected the capacity of
market in allocation of capital for different uses (Kapan and Minoiu, 2013).
It is said that the major reason from where financial crisis started in US is the inability of
borrowers to pay their loan amount. This happened because the value of homes dropped and the
borrowers found themselves with negative equity. This will result in the defaults by a large
number of borrowers in repayment of subprime mortgage loans. Banks and financial institutions
have left no option of recovery as the value of homes and land become worthless and faced the
situation of liquidity crisis.
The Financial Crisis which is faced by different economies of world are of different
types. All these different types of Financial Crisis are mentioned as below:
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 Currency crisis: This includes fall of value of different currencies of world due to the
collapse of fixed exchange rate. The effect of GFC is faced by Turkey.
 Balance of payments or external debt crisis: It includes the situation when countries
are unable to attract capital requirements to provide funds to settle their current account
deficit. Mongolia has faced this situation after GFC.
 Sovereign debt crisis: This is about the situation, when government of countries are
unable to pay their interest on existing debts. Greece is the country which faces
consequences of sovereign debt crisis (Friedman and Posner, 2011).
 Banking crisis: It is about the instability of banking systems in providence of their
functions. This crisis is mainly faced by Italy and Cyprus.
 Household debt crisis: This includes collapse of household market where the value of
homes and land becomes worthless. This situation is present in the UK and USA.
Possible causes of global-financial-crisis
There are many causes which contribute in the development of financial crisis in 2007
and 2008. It has a large number of effects on the economies of different countries. All these
possible causes and their impacts are defined as below:
 Poor policies regarding approval of loans: Due to the political pressure, government of
US prepared such banking polices in which high risk mortgages are assigned to
borrowers which don't have such credit value. This will arise the situation of non-
repayment of loans and creation of liquidity crisis (Katada, 2011 ).
 Rating agencies: They plays a huge role in raising of the financial crisis in 2007. This
will happen because high risk securities are provided as investment grade by the main
three rating agencies i.e. Standard & Poor's, Fitch and Moody’s.
 Mishap of Lehman Brothers: Lehman Brothers are bankrupted on September, 2008 due
to the collapse of house hold market. This happened because of the excessive risk taking
in providence of mortgages. The investors lose their confidence on the banking industry
and this was turned into global recession.
 Fighting among financial regulators: FDIC is the regulator which regulates banking
industry and their functions in US. This regulator is responsible for the regulation of
Federal Reserve, office of the comptroller of currency, Securities and Exchange
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Commission, etc. Due to fighting among regulators, FDIC is not having control on the
examination of savings and investment banks within OTS's and SEC's.
 Securitization of loan: Traditionally, banks retained debt with themselves and provided
chance to borrowers to repay the loan amount. This will have less chances of defaults.
But after introduction of process of securitization, banks have less control and monitor on
underwriting standards (Kemp, 2015).
 Inability to understand economic situation: Before Crisis, economists assumed that the
prices of land in US never come down. Due to such assumption, underwriters and
investors have belief that different mortgage securities are risk free. But after burst of
household bubble, whole scenario is changed and faced liquidity crisis.
 Politics: Due to political pressure, banks are blackmailed to provide loans to in-
creditworthy borrowers. This was cause default in the repayments of amount.
 Failure of Indy Mac bank: It is the major depository institution which is failed during
the crisis and seized by office of Thrift Supervision on July 11, 2008. In such situations,
major role is played by FDIC as they secure depositors and creditors against such losses
irrespective of the insurance limit. But in the case of failure of Indy Mac, FDIC goes to
secure the deposits of only $100000. This has a major impact on investors and creditors
as well as fear is spread out in whole financial market (Gerrans, 2012).
 Monetary policy in between 2004 to 2006: The interest rate on mortgage back securities
is very low initially which led to increase housing loans, but after the coming out the
policy of Fed’s to raise the interest rates in between 2004 to 2006 results in burst.
2. Conditions which contribute in repeating GFC again in the future
There are many situations which happen worldwide becomes another possible reason
behind the occurrence of GFC in future. All these reasons and causes which affect the economies
of world in a negative way and contribute in the development of financial crisis are mentioned as
below:
 Stock market: High instability is present in stock market which is affected by different
activities happening worldwide in a negative way. Failure of the policies of one country
has a large impact to drop-down the stock market prices which lowers down the capacity
of the economies of different countries.
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 Chinese economic slowdown: Another cause which has also become the reason behind
GFC in future is slow growth of economy of China.
 Houses prices: This is the major reason of GFC in 2007&2008 that has also become the
major factor in future for occurrence of Financial Crisis worldwide again.
 Credit card debts: There is high use of credit cards in the payment of their bills. Banks
provide credit cards on easy terms that has also become the future cause for GFC. As the
incapability of borrower in repayment of their debt amount again arise the situations of
liquidity crisis (Köksal and Orhan, 2013).
3. Impact of GFC on the economies of different countries
It is the biggest financial crisis situation faced by world again in 2007&2008 after the
depression in 1930. The whole world suffered consequences of financial crisis on their economic
growth, social development, infrastructure, etc. All the developing, underdeveloped and
developed nations are suffered with the effect of GFC which are described as below:
Impact of GFC on developing nations: There are many consequences being faced by
developing nations due to GFC. The major effect of GFC is on economic growth and GDP rate.
Other negative impacts are mentioned as below:
 The major impact of GFC which is evaluated by IMF in developing nations is that
borrowing from abroad is more expensive as the investors will become more risk
conscious. This reduced the economic production.
 Due to lack of financial resources, growth of industries is very low and reduced the
capacity of their business transactions. Due to having the situation of recession in
countries, they have to remove the employees which arises the situation of
unemployment.
 The GDP rate reduced to 4.1% in 2008 from 9.4% in 2006 (Helleiner, 2014).
 The flow of income is finished in countries as no investor is ready to take risks and the
source from where the countries generate finance like exports are diminished due the
effect of GFC.
Impact of GFC on underdeveloped nations: Comparatively, from developing and
developed nations, the effect of GFC is lower on underdeveloped nations. The under developed
nations like Sudan, Sierra, etc. have faced consequences. Deficit in BOP has reduced power of
government of Sudan to receive investments in the form of FDI.
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Impact of GFC on developed nations: A large number of issues are faced by developed
nations like US, UK, Australia, etc. The banking industry is totally diminished in US market and
investors lost their confidence on their operations. This will have a huge impact on the stock
market and lowers down the value of land in US.
Australia is also one of the developed nations which is affected by GFC. The issues
which are faced by Australia are mentioned as below: Australian stock market reached to the
lowest points of 3120 after effect of GFC.
 The unemployment rate in Australia is doubled after GFC and reaches towards 6%.
 There is huge fall in Australian dollar which is more than 30% from the previous value.
The major reason behind such fall is mishap of Lehman Brothers.
 The major consequences are faced by consumers as many strict actions are taken by
Australian government which includes lower interest return rates, reduction on deposits
guarantee, etc.
 Effect of GFC makes the lives of Australian individuals difficult as less growth options
are available in front of them (Hunter and et. al., 2012).
4. Reforms provided by IMF
International Monetary Fund is an institution whose main aim is to track the economic
trends, performances, etc. as well as provide policies and procedures to reduce economic
difficulties. This provides an opportunity to the developing nations to achieve economic stability
and remove unemployment (Nissanke, 2012). The major functions which are performed by IMF
includes policy advice to governments, researches and analysis of economic situations of
different nations, providing loans to help countries, contributing in the removal of unemployment
and providing technical assistance. There are major reforms provided by IMF to overcome form
the effect of Global Financial Crisis which are mentioned as below:
 Creation of crisis firewall: Main aim behind creation of this firewall is to provide
adequate amount of funds to the countries which are badly impacted by GFC and
provides help to them to strengthen their financial and economic position. To provide
funds to the member countries uses bilateral borrowing agreement at current exchange
rates (Sun and et. al., 2011).
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 Helping the world’s poorest: The first priority of IMF is to help such countries which
are poor and having low financial resources. This includes the preparation of special
policies for low income countries and provide interest free loans.
 Sharpening analysis and adequate policy advice: The major function of IMF is to
make analysis of risks and economic conditions of countries and providing policy
solutions to remove the effect of GFC (Joyce, Liu and Tonks, 2014).
CONCLUSION
It can be concluded from the above report that there are many possible causes which are
the reasons behind arising of Global Financial Crisis in 2007 which are wrong grading by rating
agencies, inadequate monetary system, irregular policies, etc. There is high impact of financial
crisis on different countries. The major effects which are faced by all nations are reduction in
growth rate, low GDP rate, unemployment and high recession, reduction in trade and exports,
low flow of cash through FDI, etc. There are many regulations provided by IMF to overcome
from adverse effect of the GFC and provide policies regarding effective regulations of banking
industry.
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REFERENCES
Books and Journals
Chaisty, P. and Whitefield, S., 2012. The effects of the global financial crisis on Russian political
attitudes. Post-Soviet Affairs. 28(2). pp.187-208.
Friedman, J. and Posner, R., 2011. What caused the financial crisis. University of Pennsylvania
Press.
Gerrans, P., 2012. Retirement savings investment choices in response to the global financial
crisis: Australian evidence. Australian Journal of Management. 37(3). pp.415-439.
Helleiner, E., 2014. The status quo crisis: Global financial governance after the 2008 meltdown.
Oxford University Press.
Hunter, W. C., and et. al., 2012. The Asian financial crisis: origins, implications, and solutions.
Springer Science & Business Media.
Joyce, M., Liu, Z. and Tonks, I., 2014. Institutional investor portfolio allocation, quantitative
easing and the global financial crisis.
Kapan, M. T. and Minoiu, C., 2013. Balance sheet strength and bank lending during the global
financial crisis (No. 13-102). International Monetary Fund.
Katada, S. N., 2011. Seeking a place for East Asian regionalism: challenges and opportunities
under the global financial crisis. The Pacific Review. 24(3). pp.273-290.
Kemp, P. A., 2015. Private renting after the global financial crisis. Housing Studies. 30(4),
pp.601-620.
Köksal, B. and Orhan, M., 2013. Market risk of developed and emerging countries during the
global financial crisis. Emerging Markets Finance and Trade. 49(3). pp.20-34.
Nissanke, M., 2012. Commodity market linkages in the global financial crisis: excess volatility
and development impacts. Journal of Development Studies. 48(6). pp.732-750.
Sun, W., and et. al., 2011. Corporate governance and the global financial crisis: International
perspectives. Cambridge University Press.
Tienhaara, K., 2014. Varieties of green capitalism: economy and environment in the wake of the
global financial crisis. Environmental Politics. 23(2). pp.187-204.
Online
Global Financial Crisis. 2018. [Online]. Available through: <https://www.canstar.com.au/home-
loans/global-financial-crisis>.
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