Global Financial Crisis (GFC, 2008-09) can be regarded as the worst disaster with respect to economy after the 1929 economic depression. The main cause for this crisis is that it leads to the deregulation of financial industry. The evolvement of the great recession has resulted in the increase in the level of unemployment and decrease in the overall price of real estates. The onset of GFC had begun by 2007 as the crisis in liquidity led to the fall in the level of confidence among the US investors with respect to the mortgages of subprime values. It also got worse due to the high level of volatility and the crash in the stock market on a global level in September of 2008. It also triggered the collapse of the housing properties within the US market along with the decrease in the flow of remittance by 6 percent in 2008-09 (Ojo 2016). IMF had stated that the developing and the developed countries are all in the turmoil of financial crisis, which has led to the fall in the output level on a global manner to 2.2 percent in 2009 (Attig et al. 2016). It can however be stated that Nepal did not get an impact of GFC in a direct manner but felt the consequences in an indirect way.
Saving on a global scale- One of the major reasons for the rise in the asset prices is the deficit in the current account, which is prevailing in the US market and has resulted in saving the income on a global manner. The attitude of the developing countries is that they are trying to save up rather than investing in the capital market, which has result in saving in mass scale. The capital market of the advanced countries are in a search for investments, which has resulted in the increasing the demand of the assets such as real estates and stocks in the US market.
Housing prices- The decline in the price of the houses has created a major shock in the financial crisis on a global manner. The period 1996-2006 saw an increase in the housing prices, as the interest rates were low and there was pressurizing demand on the new economy. In the middle of 2006 till February 2009, the price of houses began to decline and was the highest since 1987 (Balakrishnan et al. 2016). This was due to the fact that the lending of the mortgages is mainly for the richer sections, as they do not have the burden of debts of huge mortgages.
Rising rate of interest and subprime lending- The price of the houses rose due to the increase in the lax standards of the lower rate of interest and lending as well, as it was associated with the savings that were done in the economy. The increase in the interest rate has made the borrowing of the company costly (Dungey and Gahurel 2014). Moreover, the price of the houses had a huge impact, as the rate of mortgage had a slow movement than the market rate that was higher.
Credit booms- The trigger of the financial crisis led to a rapid expansion of the credit system. The access in the credit system grew at a faster rate, which led to the acceleration in the market related to real estate in the countries such as Iceland, UK, Spain, Ireland and some of the European nations. The fluctuations are largely cyclical inside the economy, which also coincides with the growth in the credit rates. The indebtedness in the US market increased after 2000, which accelerated the growth of credit (Bauer and Thant 2015). The increase in the financial mortgages, low rate of interest and the financial innovations were some of the contributing factors in the increase of indebtedness.
In the theory that is related to business cycle, there is a high chance of global financial crisis being repeated in the market. It can be stated that the occurrence of the financial crisis at the stage of expansion would lead to a further stage of depression.
Effects in financial sector- The financial sector’s health, exposure of the foreign capital market, which differs from a country to another. The impact of the foreign direct investment is adverse due to the flow of capital, which can influence the economy of countries such as India. The fiscal and the current account deficit had affected Sri Lanka with respect to the inflow of low capital externally, which led to the rise in the bonds of the country. Nepal also saw a situation of low growth due to the global financial crisis. The decrease in the prices of food and fuels led to the accumulation of low capital, as the loans that were not performing indicated a weak financial structure in Nepal (Albertazzi and Bottero 2014).
Impact of remittance- There was a decrease in the remittance flow between 2008 and 2009 by 6 percent and did not have a major impact in the Asia Pacific region when compared to 2 percent fall in the sub-Saharan Africa, Middle East, Latin America and Caribbean.
Nevertheless, Nepal did not feel the remittance flow, as it did not decline between the periods of 1998 to 2000. The country had the fifth largest recipient of remittance and had a major share of GDP on a global manner.
Reserve of foreign exchange- The corporate sector of the emerging countries had been affected by the financial crisis due to the problems related to funds and loss in foreign exchange. The funds in the market can be controlled through the activities that are present in foreign exchange by merging the economies. The reserve in the Nepalese banks during the crisis period delayed the income and the flow of remittance in the economy. The reserves increased from $3.1 billion in 2007-08 to $3.64 in the year 2008-09 (Abraham and Rajan 2014).
Impact on microeconomic balances- The trade stocks led to the decrease in the macroeconomic balances in the South Asian markets. The past months saw a decline in the prices of the commodity. The current account made the delay in the remittances along with the earnings from the exports (Vazquez and Federico 2015). The falling prices showed that the earnings had also declined in the economy.
Import- The declining trend in the prices of the commodities with respect to food and fuel was one of the features that led to the import of these goods. The other factor that causes reduction in the commodity prices is the recession that takes place in OECD and the South Asian countries.
Investment- The non-performing assets have increased in the local banks, which have caused a delay in the process of foreign funding and pose a greater risk in the growth of the investment due to its adverse impacts. This will help the company in producing lower profits for the companies that expertise in exporting products. The investment and growth in the South Asian countries has decreased the rate of foreign capital and the earnings from export (Boychuk et al. 2012).
There has been an increase in the level of volatility in the stock market, as the volatility transmission has varied from one financial market to another due to the severity of stock due to the magnitude of the task.
The crisis that took place in the US in 2009 happened due to the collapse of the subprime mortgage market, which led to the crisis in liquidity in the collapse of the stock market (Cayon et al. 2017). The increase in the level of volatility in the US market increased the volatility in the Australian stock market as well. the increase in the volatile market pushed the cost of borrowing, which resulted in the loss of confidence among the investors (Benetrix et al. 2015).
Planned capital and stress testing- The bigger banks are looking to plan their capital and test their level of stress by designing a better capital analysis so that it can help in reviewing the assessment of the lending capacity during the fall of the economy. Stress testing is another method through which the framework of capital can be based on risks (Obstfeld 2015).
Heightened capital regulations- The capital requirement that are based on risks needs to be heightened so that it can help in weighing the assets that are related to risks (Haas and Lelyveld 2014). The banks need to have a higher standard of capital and the regulations have to be based on the risks as well so that the equity capital can be raised according to the risky assets.
Formation of tools for facilitating reorganization and failure in complex financial firms- The revolution will help in creating large and complex financial banks (Kemp 2015). Some of it can be the introduction of entry points that can be single, authority for liquidation in an orderly manner and the capacity to absorb the total loss will help in carrying the failures through the holders of long-term debt and not the taxable citizens.
Conclusion
The report helps in demonstrating the impact and the causes of global financial crisis on the various countries and in particular with Nepal. The global financial crisis has had created an impact on the third round of the flow of cash remittances, reserves of foreign exchange and the prices of the commodity. The financial crisis had a cascading impact on the economy of Nepal that were related to non-investment in the unemployment and the productive sectors. The financial system that is present in Nepal was not impacted directly by the financial crisis. The impact on the rate of growth decreased due to the decline in the global demand of the manufactured product in the country. Moreover, the stock market of the various countries was at a loss, which limited their growth in the stock market. From the discussion, it can be stated that the global financial crisis had an influential characteristic on the financial structures of most of the countries, which hampered the medium and the small firms with a large flow of investments. The countries that developed and developing have faced problems due to the financial crisis, as there has been a decline in the long-term debts and the leverage of the firms with respect to fiscal policies.
Reference List
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