global financial stategies

Global Financial Strategies

Subprime Mortgage Crisis

As explained by Allen(2013), global recession and financial crisis were triggered by what is commonly referred as bursting of the American housing bubble in 2006 summer. The housing prices in the US fell at a sharp rate which caused an expected downturn in the household wealth which in turn led lower spending of consumers, and the GDP fell overall. The falling house prices increased the number of mortgage defaulters and foreclosure, which is responsible for the increase in the number of available houses in the market, and caused house prices decline further. All the home owners in America, who had acquired their homes through mortgages, had the mortgage exceeding the value of the house.  He debt was higher was 20% higher than the real value of the house for one-sixth of the owners. High loan-to-loan ratios combined with domestic financial difficulties of US citizens further increased foreclosures and defaults (Allen, 2013)

Allen(2013) postulates that  high defaulting rates made banks lose money which in turn led to the banks reduce lending and protect their resources. Belgium is one of the countries affected badly by the American financial crises because Fortis the Belgian bank, had assets in the US estimated to be more than the Belgian GDP and at the time and all were placed at risk. By the end of 2008, Japan, Germany and China experienced some recession together with other small countries. Many European countries experienced financial problems due to their huge investment in American real estate securities. Export-Oriented manufacturers in China and Japan were negatively affected because their markets in US and Europe were undergoing a major recession and demand for their products fell. The less-developed countries were not spared either because they lost their major markets in the US and Europe (Allen, 2013).

Statistical break down of Mortgage Crisis

In last quarter of 2005  home prices started falling up to 40% in the US.In 2007 more 25 subprime lenders had filed for bankruptcy. In the same year hedge funds and financial firms owned in excess of$1 trillion securities backed by failing subprime mortgages. By 2008 October, Federal funds rate fell to 1% and the discount rate was reduced to 1.75%. Central Bank of England, Canada, Sweden, Switzerland and China also cut rates to help the global economy (Allen, 2013).

European debt crisis

The European debt crisis can be summarized as rising from slow growth in Europe, challenges in the banking sector and some countries experiencing crushing levels of government debt. According to Allen (2013), the European countries use a common currency but have major cultural and economic differences. When the Greek economic problems were finally many Banks Europe which had purchased piles of debt of Greek instantly found themselves in the problem of accessing credit due to their high liquidity. Ireland and Spain banking sector experienced a major financial crisis due to the bursting house bubbles. The collapse of the construction of construction sector in Spain further raised the unemployment levels. In late 2009, the Greece debt had risen to 113% of GDP. Germany as the strongest economy in Euro area has been providing bailouts, and its taxpayers are unhappy.

Different arguments have been brought up by different analysts related to how the Eurozone crisis will play out.Few believe that the zone should retain its 17 members while most believe for the greater good, members with weak economies should leave. It has been suggested that the weak economies should reintroduce their currencies, devalue them which in turn would result in economic growth. Most politicians believe in the idea of retaining the current composition of the zone and the stronger economies support, the weaker and be patient until their economies recover. The other possible scenario is a limited breakup of the Euro; where countries like Greece, Ireland, and Portugal leave the Eurozone and introduce their currencies. The major disadvantage of such a move is further weakening of the small economies and economic collapse affecting banks all over Europe. The other possible scenario smaller economies as well as some significantly large economies like Belgium leaving the Eurozone leaving only the strongest countries like Germany. Finally, all the countries may agree to split and each to go its way and solve their problems in their way (Allen 2013)

References

Allen, L. (2013). The global economic crisis: A chronology. London: Reaktion Books.

 

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