Global Financial Crisis and Return of Asian - MyAssignmenthelp.com

Question: Discuss about the Global Financial Crisis and Return of Asian. Answer: Introduction The Global Financial Crisis (GFC, 2008-2009) was considered to be the worst disaster with respect to economy after the economic depression that took place in 1929. The main factor for this crisis was due to the deregulation that happened in the financial industry, which also led to the increase in the level of unemployment and the decrease in the prices of houses. The rise of GFC started from 2007, as the liquidity crisis resulted in the confidence level to fall among the investors present in the United States in valuing the subprime mortgages. The financial crisis also led to the high level of volatility and the crash that happened in the stock market in 2008 September. It also influenced the decrease in the price of houses in the market and the flow of remittance was 6 percent on a global manner during the period of 2008-2009 (Ojo 2016). The International Monetary Fund (IMF) stated that the developed and the developing countries was under the financial crisis and the output level o n a global basis was at only 2.2 percent in 2009 (Attig et al. 2016). However, Nepal did not feel the impact of GFC in a direct way but had several indirect impacts on the economy of the country. Discussion Possible causes The possible causes that led to GFC are as follows: Global saving- The major reason for the increase in the price of assets was due to the deficit that was present in the current account and the manner of saving globally in the US market. The countries that have a current account in a better way and the deficits in trade before the financial crisis took place, were increasing their rate of savings, which led to the stop of foreign borrowings and did not become a lender to the United States. Most of the developing countries increased their capacity to save instead of purchasing in the capital market, which led to the reversal and increased the savings on a global manner. The capital market of the advanced countries was searching for investments, which led to the increase in the price of the assets in the United States including the stock market and the housing properties. Price of houses- The decline in the price of houses substantially led to one of the primary shocks that triggered the rise of the financial crisis on a global manner. The period 1996-2006 saw an increase in the prices of housing properties, as the rate of interest was low that led to increased pressure in the current economy. Between the year 2006 and the mid of February in 2009, the price of the houses were decreasing and it was the highest after 1987 (Balakrishnan et al. 2016). This was due to the fact that the lending of mortgages was being directed towards the rich, as they did not feel the burdens of debts on these large mortgages. Figure 1: Decline in price of houses (Source: imf.org 2018) Increased interest rate and subprime lending- The price of the houses increased more due to the low rate of interest and the lax standards that was present in lending, which is associated with the savings on a global manner. Most of the borrowers who took the loans were mostly the subprime lenders and the standards were not being met due to the credit worthiness that was very poor. The increase in fed rate of interest helped in making the borrowings more costly (Dungey and Gajurel 2014). Moreover, the price of the houses faced a bad impact due to the rate of mortgages that were passing through a low to higher rates in the markets. Credit booms- The increase in the financial crisis happened due to the role of the expansion of credit. The access in the credit increased at a greater pace due to the boom that took place in the market related to real estate in the countries like the United Kingdom, Iceland and other European countries along with the countries like Ireland and Spain. There were large fluctuations in a cyclical manner in the economy due to increased growth of credit in the market. The indebtedness related to the housing properties increased suddenly after 2000 although the accelerated growth of credit was not that much that can reflect a slower growth in the rate of credit (Bauer and Thant 2015). The innovations related to financial activities, increased financing to the mortgages and the low rate of interest were some of the factors that contributed towards the factors of indebtedness related to housing properties. Possibility of repeating the financial crisis With respect to the theory of business cycle, there is a high chance of the global financial crisis to be repeated again in the market. It can be stated that the chance of financial crisis, which might lead to global financial system is lingering on the stage of expansion, which could lead the economy in to a further stage of depression. Figure 2: Possibility of Global Financial Crisis (Source: Created by Author) Impact of financial crisis in various economies and Nepal Effects on financial sector- The health of the financial sector along with the performances on a macroeconomic level and the exposure that is present with respect to the foreign markets is different in all the countries. The capital flow and the foreign direct investment had an adverse effect, which played an influential role in the economy of India. The deficit in the current and the fiscal account had an impact on Sri Lanka with respect to the low flow of capital on an external manner, which resulted in the rise of bonds within the country. In Nepal, the impact due to the financial crisis on a global manner was also felt, as the country was developing from a situation of low growth. The decrease in the prices of food and fuel and the increase in the level of inflation along with the financial indicators such as adequacy rate of low capital and the loans that were not performing have contributed heavily towards the financial sector that was present in Nepal (Albertazzi and Bottero 2 014). Remittance impact- The flow of remittance declined due to GFC by 6 percent in the year 2008-09 and some of the countries in the Asia Pacific region felt it at 2 percent in comparison with Latin America, Central Asia, Middle East, Caribbean and North Asia. Figure 3: Flow of remittance globally (Source: Vazques and Federico 2015) Figure 4: Flow of remittance in Nepal (Source: lib.icimod.org 2018) Nevertheless, with respect to Nepal, they did not have any experience with the remittance flow. The remittance flow in the country did not decline since 1998 to 2010 and was the fifth largest recipient of remittance on a global manner. Reserves on foreign exchange- The corporate sector in the emerging and developed economies have affected the financial crisis in a significant manner due to the increase in the problems of funding, which lead to the loss in the foreign exchange. The needs of the overall funding by the marketer have to be curtailed so that the funding in the foreign exchange activities can be done in the economies that are merging. The reserves in the foreign exchange within the banking system of Nepal had decreased due to the delay in the rate of interest income and the inflow through remittances. The foreign exchange reserves grew to 21.9 percent in the year 2008-09 as compared to 17.3 percent in the year 2007-08 (Abrahan and Rahan 2014). Impact on macroeconomic balances- The stocks of trade has led in the worsening of the balances with respect to macro economy in the South Asian countries. In the past few months at the time of the financial crisis, the prices of the commodities were decreasing, which led to the delay of the remittances and the earnings from exports within the current account (Vazquez and Federico 2015). The fall in these prices led to the decrease of the revenue earnings as well. Import- The decreasing trend in the price of commodity such as fuel and food was one of the main features with respect to import. The reduction in the prices of the commodities on a further basis was due to the recession that took place in the OECD countries and the other countries present in South Asia. Impact on housing industry The assets that were not performing in the local banks and the delay in the funding from the foreign are the major risks that hindered the growth of the investment. This will result in making the profits low for the companies that specializes in exporting the products available in the market. The availability of the finances in the domestic market for the investment purpose was decreased, which led to the delay in the rate of investment in the domestic manner. The investment and the growth in the countries present in South Asia decreased due to the export earnings and foreign capital (Boychuk et al. 2012). Impact on share market The high level of volatility in the stock market and the transmission of it from one market to another may result in the severity of the trade stocks. The crisis that happened in the US in 2009 resulted due to the collapse of the subprime market in mortgage, which led to the crisis in liquidity. In the financial crisis, the volatility increased in New Zealand and Australian stock markets as well. This volatility in the market pushed up the cost of borrowing, which resulted in the loss of confidence level amongst the investors (Benetrix et al. 2015). The financial sector in Nepal is not related to the global financial system, as in the first instance they did not suffer from the adverse effect of financial crisis. The investment and the share market in the country did not have a link in the investment market present globally but felt the repercussions in the second and the third rounds, as they experienced decrease in tourism, which led to the burden of debt servicing and the loss in the foreign aid. The availability of the funds in banks of Nepal is more that the required amount and the vulnerability of the reserves had an indirect impact on the financial crisis, which weakened the spending of the consumers (Cayon et al. 2017). Reforms Capital planning and stress testing- The banks were planning their capital and stress testing by designing better methods for the analysis of capital, which would help in the assessment of the capacity to lend during the economic downturn with the lending to the companies. Stress testing was another regime, which helped the banks in making a framework for calculating the risks (Obstfeld 2015). This will help in increasing the level of transparency. High regulation of capital- The capital requirements that were based on risks heightened the equity with respect to the assets based on risks (Haas and Lelyveld 2014). The banks need to have a higher standard regarding the capital so that the risks can be calculated against the equity capital. Tool formation for reorganizing complex financial firms- The use of a single mode of entry, the capacity to absorb the losses and the authority to liquidate will help the banks in coping up with the losses that they may face with the financial crisis on a global manner. It would also ensure that it can be borne by the holders of long-term debts and not the taxable citizens. Conclusion This report concentrates on the cause and impact of the financial crisis on a global manner in various countries and in particular with Nepal. It can be stated that the country felt the repercussion in the second and third round with respect to the flow of remittance, reserves in foreign exchange and the prices of commodity. The country also had a negative impact due to the rate of growth in the country and the fall in the demand for manufacturing companies on a global manner. Reference List Abraham, V. and Rajan, S.I., 2014. Global Financial Crisis and Return of South Asian Gulf Migrants. 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