Countries around the world are still struggling to reenergize their sluggish eco
ID: 2767404 • Letter: C
Question
Countries around the world are still struggling to reenergize their sluggish economies from the impact of the Global Financial Crisis (GFC) and the Eurozone Sovereign Debt Crisis. Implementation of quantitative easings; fiscal and monetary policies to revitalize the economies are now been hampered by low commodity prices, declining crude petroleum oil prices and the volatility in foreign exchange markets. The current economic scenario poses a variety of challenges to the treasury of banks around the globe.
(1) Explain the Global Financial Crisis and the Eurozone Sovereign Debt Crisis. What were the causes?
Explanation / Answer
The global financial crisis (GFC) or global economic crisis is commonly believed to have begun in July 2007 with the credit crunch, when a loss of confidence by US investors in the value of sub-prime mortgages caused a liquidity crisis. This, in turn, resulted in the US Federal Bank injecting a large amount of capital into financial markets. By September 2008, the crisis had worsened as stock markets around the globe crashed and became highly volatile.
The financial crisis happened because banks were able to create too much money, too quickly, and used it to push up house prices and speculate on financial markets.
Causes:
While few predicted the financial catastrophe, almost everyone has an explanation as to why it happened. To economists, it all seems painfully simple. Too much foreign money was flowing into the US from the Asian countries especially China.
The availability of easy credit meant that too many people borrowed to buy properties that they could not afford. The bankers bundled up these loans and sold them to investors that could not understand the complexity of these bundles and the risks inherent in them.
Once US borrowers started defaulting on their mortgages, they lost their houses and investors all around the world, including banks and hedge funds, lost their investments. For the critics of Bush administration, the government failed to regulate the activities of the banking behemoths. For the Fed critics, the crisis resulted from Alan Greenspan’s policy of keeping the interest rates low for an extended period of time.
Given the ongoing nature of the crisis, many complicated explanations will surface in the years to come. Yet the root of the economic depression might very well lie in one fundamental human instinct: greed.
Eurozone Sovereign Debt Crisis:
With Europe’s ministers calling meeting after meeting and making complicated proposals while the media warns there’s only weeks to save the euro, it’s hard not to notice Europe’s in a state of crisis. But what exactly is going on? Whose crisis is it and how are we going to fix it?
In a nutshell, the crisis in Europe has to do with the fear that some countries may be unable to pay back their debt. But debt in itself is not always considered a problem and European governments often use more money than they earn. Governments were able to borrow so cheaply in the past decade that running a deficit was often used to stimulate economic growth.
One of the ways governments can raise money is through selling bonds, which are bought back after a number of years with interest added. Interest on government bonds has been low for most European countries because bonds were considered secure investments. The market worked on the assumption that governments would always be able to afford buying them back.