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World Financial crisis

Contents :1. The world financial crisis

2. Who are the major victims? 3. Financial crisis in USA

4. Financial crisis remains virulent in the entire globe? 5. Not as an isolated phenomena

6. What went wrong?

7. EU facing a pernicious situation? 8. No country is immune?

9. Financial crisis with politics 10. The impact of the Financial crisis for the entire world

2 11. Possible remedies to overcome this turbulence?

References

1. The world financial crisis

Yet it is also true that small events at times have large consequences, that there are such things as chain reactions and cumulative forces. It happens that a liquidity crisis in a unit fractional reserve banking system is precisely the kind of event that can trigger-and often has triggered-a chain reaction. And economic collapse often has the character of a cumulative process. Let it go beyond a certain point, and it will tend for a time to gain strength from

its own development as its effects spread and return to intensify the process of collapse. Because no great strength would be required to hold back the rock that starts a landslide, it does not follow that the landslide will not be of major proportions.1 The ongoing financial crisis in Europe is remarkable in several perspectives. The crisis hit the most financially stable economies in the world, especially in Europe and prompted the largest financial bailouts in current days. This bailout has proved to be contentious, with scepticism among member states as to whether it will work. The critical and unpredictable issues surrounding this crisis are viewed by many as the most serious since the collapse of Lehmann Brothers, and the long-term effects for the stability and prosperity of the EU.2 This is widely known as the sharpest financial crisis to hit the developed world since the 1982 debt crisis in East Asia. 2. Who are the major victims? The International economic relations are becoming broader and complex than ever with the on-going Greek and Italy debt crises and the possible implications for the rest of the Euro zone as well as the entire world. With Greece, Italy , Ireland, Iceland, Spain and Portugal are already suffering contagion effects from sovereign debt crisis the International financial market and trade will also be unfold with this continuous crisis. The European financial world has been shaken with the potential threats of widely expansion of this great turmoil in alarming proportions. In this context, Europe, long seen as quiet, stable, peaceful and almost much prominent in International relations, moves into uncharted waters as fallout from an accelerating euro crisis proves to have high-stakes of political consequences.3 Governments in Ireland and Portugal were replaced earlier this year, and now Greece and Italy are undergoing a political reordering following this financial crisis that is still remain controversial as well as unpredictable.
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Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867-1960 www.cnn.com/2010/BUSINESS/02/10/greek.debt.qanda/index.html www.csmonitor.com/World/Europe/2011/1110/Greece-debt..

When a country that maintains a fixed exchange rate is suddenly forced to devalue its currency because of a speculative attack, this is called a currency crisis or balance of payments crisis. When a country fails to pay back its sovereign debt, this is called a sovereign default. While devaluation and default could both be voluntary decisions of the government, they are often perceived to be the involuntary results of a change in investor sentiment that leads to a sudden stop in capital inflows or a sudden increase in capital flight.4 From late 2000 onwards the developed economies of the world are experiencing the harmful repercussions of this sovereign debt crisis being unable to accumulate their higher levels of debts with insolvency.
3. Financial crisis in USA

The late 2000s financial crisis in United States was resulted with the collapse of large financial
institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market had also suffered, resulting in numerous evictions, foreclosures and prolonged vacancies. It contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, and a significant decline in economic activity, leading to a severe global economic recession in 2008.5 Critics argued that credit rating agencies and investors failed to

accurately price the risk involved with mortgage-related financial products, and that governments did not adjust their regulatory practices to address 21st-century financial markets. 6

4. Financial crisis remains virulent in the entire globe In the face of worsening financial and economic conditions, markets are pricing in expectations of much higher corporate default rates, as well as higher losses on securities and loans, in part, because pressures have now broadened to emerging markets, raising recapitalization needs. Thus, financial conditions are likely to remain tight for a longer period and to be more impervious to policy measures than previously expected.7 As the world is becoming more globalized, almost every aspect of human life is inter connected with each other far beyond
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www.wikipedia.org/wiki/Financial_crisis www.wikipedia.org/wiki/Financial_crisis www.economist .com

borders and continents.With such a globalized system, a credit crunch can ripple through the entire economy very quickly turning a global financial crisis into a global economic crisis.
5. Not as an isolated phenomena

The global financial crisis was originated in United States in 2008 and which was reverberating the entire global economy from that onwards whereas ultimately triggered in Europe. Where the uncertainty still prevails among the states where the global financial crisis will turn next and what it will mean for the rest of the world.8 The fact of the matter is that none of those previous crises can not be treated as isolated historical incidents. Rapid globalization of the economy has increased the frequency and spread of such incidents by generating a ripple which has exposed the fragility of the financial system and it is becoming increasingly clear that the effects of the initial subprime crisis are spreading across the global asset markets in to the real economy.9 Signs of global economic crisis were visible from early 2008 with a gradual decline in demand in developed countries for imports from developing countries.10

6. What went wrong?

Countries like Ireland, Portugal, Spain, Greece and Italy overspent wildly for years and racked up annual budget deficits that have left them with monstrous debt. Italy holds 1.9 trillion in debt, or 120 percent of the size of its economy. As mentioned above, Years of unrestrained spending, cheap lending and failure to implement financial reforms left Greece badly exposed when the global economic downturn struck. This whisked away a curtain of partly fiddled statistics to reveal debt levels and deficits that exceeded limits set by the Euro zone.11 National debt, put at 300 billion ($413.6 billion), is bigger than the country's economy, with some
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IMF : www.imf.org/external/pubs/ft/weo/2008/update/03 www.nytimes.com/.../europe/european-debt-crisis

Liberals and Democrats workshop, The International Financial crisis : its causes and what to do about it?, 28.02.2008
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Dr. Saman Kelegama,( Executive director Institute of policy studies),Global economic crisis and Sri lanka,
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estimates illustrated almost it reached 120 percent of gross domestic product in 2010. The country's deficit -- how much more it spends than it takes in is 12.7 percent. Greece's credit rating - the assessment of its ability to repay its debts -- has been downgraded to the lowest in the euro zone, meaning it will likely be viewed as a financial black hole by foreign investors. This leaves the country struggling to pay its bills as interest rates on existing debts rise.12 The 2009 financial crisis in United States was resulted due to the collapse of banking system whereas Greece financial crisis was emanated due to the larger quantity of over debt followed by insolvency of the government. In this sense it is quite argumentative the scope of the role of government and private sector throughout this crisis era. 7. EU facing a pernicious situation? Greece is already in major breach of euro zone rules on deficit management and with the financial markets betting the country will default on its debts, this reflects badly on the credibility of the euro. There are also fears that financial doubts will infect other nations at the low end of Europe's economic scale, with Portugal and the Republic of Ireland coming under scrutiny. If Europe needs to resort to rescue packages involving bodies such as the International Monetary Fund, this would further damage the euro's reputation and could lead to a substantial fall against other key currencies.13 Despite the fact that, the euro is probably the single most important
European project from an economic as well as a political perspective.14 And history has shown that the promised benefits were not mere theoretical concepts but have indeed materialized over the past 12 years. Altogether, the euro has definitely been a success and the financial crisis has not proven otherwise. On the contrary: throughout the crisis, the euro had a stabilizing effect and the Euro system demonstrated its ability to conduct an effective crisis management. Nevertheless, it cannot be denied that the crisis revealed a number of structural deficiencies which require further reflection.15

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www.cnn.com/2010/BUSINESS/02/10/greek.debt.qanda/index.html www.csmonitor.com/World/Europe/2011/1110/Greece-debt www.cnn.com/2010/BUSINESS/02/10/greek.debt.qanda/index.html www.guardian.co.uk/business/debt-crisis Axel A Weber: The euro opportunities and challenges, PDF

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The unemployment rate across the EU rose to 9.8% in October from 9.7% the previous month, while within the eurozone the jobless rate also increased, to 10.3%.16The situation in Europe and the world has significantly worsened over the past few weeks. Market stress has intensified .... (and) we are now looking at a true financial crisis -- that is a broadbased disruption in financial markets.17 The Economic and Social Research Institute said Europe faces a repeat of the 1930's Depression18
8. No country is immune?

No country is immune with this turbulent crisis. Very recently after Germany tried to auction $8 billion worth of its national bonds and could persuade investors to buy only $5.2 billion. It was a sign that even mighty Germany was not immune from the debt crisis.19 Allowing a central European authority to have some control over the budgets of sovereign nations would create a fiscal union in Europe in addition to the monetary union of the 17 countries that share the euro currency. Some analysts have said that would be a leap toward creating a United States of Europe. More delicately, it would force the nations of
Europe to swallow their national pride, cede some sovereignty and agree to strengthen ties

with their neighbors rather than fleeing the euro union during the crisis.20 Right now, virtually nobody wants to loan money to financially troubled nations in the EU and virtually nobody wants to lend money to major European banks. Remember, one of the primary reasons for the financial crisis of 2008 was a major credit crunch that happened here in the United States. This burgeoning credit crunch in Europe is just one element of a "perfect storm" that is rapidly coming together as we get ready to go into 2012.21

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www.theguardian.com

Commissioner Olli Rehn delivering his eurozone growth forecast in Brussels, in front of a backdrop spelling out his stark message(EU finance ministers' meeting in Brussels)30.11.2011
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www.theguardian.com www.internationalviewpoint.org/spip.php?article1581 www.oecdobserver.org/.../Financial_crisis...the_economy.html www.econmatters.co,/financial crisis

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9. Financial crisis with politics European leaders will not be able to kick the can down the road indefinitely. Matters worsen almost daily. Italys debt was recently downgraded. Economies are contracting. Greece is fighting for one more breathe in the form of the next tranche of oxygen from the IMF. 22 Both Greece and Italy are the worst victims of this debt crisis whereas its financial systems are severely collapsed. Moreover Greeks political crisis was sparked by departing Prime Minister George Papandreou few weeks ago after he called for a referendum on a stringent austerity plan demanded by the EU as terms for its bailout; world markets tumbled, and Mr. Papandreou could not survive the resulting political and European turmoil.23 At the same time, Berlusconis resignation has been widely sought across the Italian political spectrum in an effort assure the EU and financial markets that Italy can put its house in order. The third largest economy in Europe in the past month has seen its borrowing costs zoom upward to unsustainable levels as its debt balloons to some $2.4 trillion. Italys borrowing costs soared above 7 percent today, a figure often cited as a benchmark for insolvency. 24

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The impact of the financial crisis in the entire world

Countries across the continent are struggling to find ways to cope with the growing financial crisis. From the nationalization of domestic banks to multi-billion cash injections into the capital markets, Europe's politicians, regulators, and market players are trying different approaches to deal with the mounting problems. 25 A global economic slowdown is now
projected26 and recession is already gripping a number of major developed economies. Industries likely to be especially affected are a number of manufacturing industries, including automobiles,
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www.heritage.org/Research/Testimony/2011/09/The-European www.globalissues.org/article/768/global-financial-crisis www.tomorrowsworld.org bx.businessweek.com/european-financial-crisis

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According to the most recent IMF forecast in Nov 2008 www.imf.org/external/pubs/ft/weo/2008/update/03

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aircraft, building materials, consumer goods, steel, and services such as transport services ,air lines.27 And large companies in many industries were seriously affected by the decline in sales.

Starting with financial services, which have been directly affected by the crisis, the shock waves have hit many other industries, ranging from extractive industries and manufacturing to infrastructure services.
Furthermore Currency chaos and defaults by governments and companies would

weaken European banks and also cause them to stop lending to each other. Because banks are connected globally, a credit freeze in Europe would spread. As it did in 2008, a credit freeze would cause stock markets to sell off worldwide, and another deep recession would probably follow.28 In this sense this global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. Both developed and developing countries throughout the world might have affected direct or indirect consequences of this mass turmoil. Governments economic mismanagement of its own financial system is the root cause for the debt
crises of many countries.

Within this purview many nations, whether wealthy and industrialized, or poor and developing, are sliding into recession if they are not manage their economys functions cautiously and vigilantly as already risk is waiting there.

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Possible remedies to overcome this turbulence?

Greece achieved an artificially high standard of living largely by borrowing from abroad. This also led to increases in wages and prices that far outstripped productivity growth, leaving Greek producers uncompetitive within and without Europe. With governments over expenditure and mismanagement of the finance system were triggered its debt crisis. For this turmoil Greece have two very unpalatable options. One option is to let a deep, prolonged depression drive down wages and prices to the point where Greeces workers and companies can generate a trade surplus.
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www.globalissues.org/article/768/global-financial-crisis

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Assessing the impact of the current financial and economic

crisis:www.unctad.org/en/docs/webdiaeia20091_en.pdf

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The other option is to make the adjustment the old fashioned way to devalue. And theres the rub as a member of the monetary union, Greece lacks a currency to devalue; which is why the arguments about how difficult or painful it would be for Greece to break out of the Euro are irrelevant. There is no less painful alternative as long as Germany refuses to work so Greece can enjoy the fruits of German labor.29 As Financial Times columnist James Mackintosh wrote in Wednesdays paper, Fixed exchange rates force economic adjustment via wages and prices; Greece needs dramatic wage deflation to regain competitiveness against Germany. The political impossibility of slashing pay packets enough is a reason it may have to leave the Euro, even though living standards will fall either way.30 Europe is going through a very difficult period. We must provide a convincing response to the crisis. Yet the need for fiscal consolidation is limiting Member States' room for manoeuvre to introduce new stimulus programmes.31 In spite of this situation, Led by Germany's Chancellor Angela Merkel, all 16 countries which make up the euro zone have agreed a rescue plan for their ailing neighbor. The package, which would only be offered as a last resort, will involve co- ordinate bilateral loans from countries inside the common currency area, as well as funds and technical assistance from the International Monetary Fund (IMF). According to a joint statement on the EU Web site, a "majority" of the euro zone States would contribute an amount based on their Gross Domestic Product (GDP) and population, "in the event that Greece needed support after failing to access funds in the financial markets." 32 It is evident that German will be largely contributed for this followed by France. Although the announcement did not mention any specific figure, a senior European official quoted by Reuters said that the potential package may be worth around 20 billion euro (US$26.8 billion). At the same time 6 of world central banks loans through the International Monetary Fund may deliver as much as 200 billion Euros ($270 billion) to fight the debt crisis with Fears of a second credit crunch could prompt and to pump liquidity into the

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www.heritage.org/Research/Testimony/2011/09/The-European. www.heritage.org/Research/Testimony/2011/09/The-European. 23 Nov 2011 | Economic Governance, European commission, Economic and Financial affairs www.cnn.com/2010/BUSINESS/02/10/greek.debt.qanda/index.html

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markets33 Under the proposal, national central banks would recycle funds through the IMF, potentially to underwrite precautionary lending programs for Italy or Spain, the two countries judged to be the most vulnerable now, the people said34. So far, EU officials have been treating the debt crisis as a liquidity issue that can be dealt with using bail-outs. However, if economies the size of Italy get caught up in it, then broader structural changes to the Euro zone are likely to be required.35 Moreover European Union being the strongest regional economic integration in the world it can not let its members to destroy. In essence of the word being a union they have to overcome this turmoil collectively. In this context the economic crisis has prompted intense and sustained action by the EU's national governments, the European Central Bank and the Commission. All have been working closely together to support growth and employment, ensure financial stability, and put in place a better governance system for the future.36 References

Milton Friedman and Anna Schwartz, A Monetary History of the USA, 1867-1960 Dr. Saman Kelegama,( Executive director Institute of policy studies)Global economic crisis and Sri lanka, www.cnn.com/2010/BUSINESS/02/10/greek.debt.qanda/index.html www.csmonitor.com/World/Europe/2011/1110/Greece-debt.. www.economist.com www.wikipedia.org/wiki/Financial_crisis IMF : www.imf.org/external/pubs/ft/weo/2008/update/03 Liberals and Democrats workshop, The International Financial crisis : its causes and what to do about it?, 28.02.2008 Axel A Weber: The euro opportunities and challenges, pdf file www.globalissues.org/article/768/global-financial-crisis www.theguardian.com: Euro zone crisis,30 November 2011

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www.bloombers.com/financial crisis www.telegraph.co.uk/finance/financialcrisis/8629228/... European commission, Economic and Financial affairs : Last update: 30 November 2011

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www.tomorrowsworld.org Assessing the impact of the current financial and economic crisis:www.unctad.org/en/docs/webdiaeia20091_en.pdf www.internationalviewpoint.org/spip.php?article1581 www.oecdobserver.org/.../Financial_crisis...the_economy.html www.heritage.org/Research/Testimony/2011/09/The-European. European commission, Economic and Financial affairs www.theguardian.com: Euro zone crisis www.telegraph.co.uk/finance/financialcrisis/8629228 bx.businessweek.com/european-financial-crisis

www.bloombers.com/financial crisis www.econmatters.co,/financial crisis