The financial crises are termed as the global economic crisis for financial markets and banking industry. Beginning of the crisis gave a collapse in the market of high-risk mortgages in the United States. By the early 2008 crisis has been global in nature and gradually began to emerge in the general slowing of production, reducing demand and prices for raw materials, rising unemployment. Financial global crisis is now day's mostly debated topic. We often hear that unemployment is increasing in US and even countries like Italy and Greece are very close to default. The effects of financial crisis 2008 have significant impacts on the financial industries of the world. While the crisis initiated in the U.S, it severely combined with other countries of the world particularly U.K, where the effects were long-lasting.
Causes of the Global Economic Crises
The crisis began in 2006 reveal a decline in prices of real estate. In mid 2007, the subprime bonds were securities without any coverage. When home prices started to decline in the U.S., two investment funds of the bank Bear Stearns went bankrupt in July 2007. Banks have suffered very seriously, losses calculated in billions of U.S. dollars. These losses were so great that in March and April 2008, the major banks of USA (Merrill Lynch, Goldman Sachs, Morgan Stanley, Lehman Brothers, and Citigroup) have been hastily capitalized to avoid bankruptcy. It was feared that the bankruptcy could trigger a domino effect, bankrupt banks and enterprises, unemployment and economic crisis, was comparable to the crisis of the century from 1929.
The crisis was caused by mortgage loans, which give the banks at high risk of repayment options to people with insufficient funds (called sub-prime mortgage). These loans became collateral structured bonds sold in bulk and speculative investment purposes by private financial institutions, including the largest American and European banks. Awareness riskiness of these bonds was limited because continued growth in the real estate market and the highest rating institutions issue a safety evaluation of high risk bonds. Insolvency individual with unexpectedly high percentage (9.2%) resulted in a lack of cash turn in the credit market and the volatility (risk of impending insolvency claims) of these institutions.
Implications
The stocks markets have plunged as a result of the credit crisis with the banking stocks taking a battering. About 60 percent of the UK pension funds have been invested in the stock market. The fall in the stock markets reduced the value of these pensions, significantly affecting many people who are on the brink of their retirement. Similarly companies and funds which had invested in the stocks have lost millions of pounds and their balance sheet appears to be much more vulnerable. Due to the global nature of the crisis a large number of intuitional and individual investors are also poised to lose huge amounts of money which they had invested in foreign banks (Icelandic banks, for example).
The 2007-2009 Financial crises, similar to the Great Depression and Japan's lost decade, started with the bursting of an ...