Causes of Global Financial Crisis
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Discuss About The Corporate Governance And Risk Management?
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).
The list given below can be considered as the possible causes that might have led to the occurrence of the global financial crisis-
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).
Global Saving Glut
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.
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.
Prices of Housing
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 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.
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 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.
Increase in the Rate of Interest and the Subprime Lending
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 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.
nvestment- 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 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
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.
Credit Explosion
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 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.
Reference
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