GLOBAL FINANCIAL CRISIS 1

Global Financial Crises: Causes, Context, and Consequences

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Contents
Introduction................................................................................................................ 4
Causes of the Global Financial Crisis..........................................................................4
The impact of the crisis on global economies and financial markets..........................6
Consequences of the financial crisis in the GCC region..............................................7
Measures taken by GCC countries to combat the crisis after-effects..........................9
BIBLIOGRAPHY.......................................................................................................... 11
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Introduction
The term Financial Crisis is connected comprehensively to an assortment of

circumstances in which some budgetary resources all of a sudden lose a vast piece of their

ostensible esteem.

The Global Financial Crisis, also known as the Credit Crisis mainly began in July 2007. It

began with the decrease in the lodging market that in the end prompted to expanded levels of

home loan defaults. These defaults provoked drops in the estimation of home loan supported

securities and, as misfortunes in the home loan advertise developed, investors steadily started

staying away from all hazard. Subsequently, global asset prices fell, liquidity became scarce, and

freeze set in the commercial center. ("Financial crisis", 2016)

We will now see the main causes of the Global Crisis in detail.

Causes of the Global Financial Crisis

One of the causes that actually initiated this crisis was that it was a widely believed that the home

prices would not fall, and were also expected to increase indefinitely. The purchasing of these

homes were mainly being done with the intention of flipping (reselling) them. This lead to a

greater number of houses being sold out and simultaneously increased the sale of mortgage-

based securities. Investors, completely oblivious to the possibility of the home prices to slide

back, purchased many such securities with the intention of receiving the interest and principal

periodically.

Next, comes the period of decline in the home prices. The property holders found that the

exceptional adjust on their home loans was greater than the market estimation of their homes.
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This situation, known as the upside down mortgage, demotivated the homeowners to pay the

outstanding mortgage payments. Along with this, many households were issued sub-prime

mortgages, which in comparison to the prime mortgages, were riskier and issued to households

that had below-average income or credit histories. Other subprime borrowers were attracted into

their home loans by the at first low installments, yet when these "secret" rates reset to current

market rates, numerous property holders couldn't manage the cost of the new, much higher

installments.

Now comes the problem that arises in the mortgage-backed securities markets. As the home

prices started to decline, many households could no longer be able to pay their monthly mortgage

payments, this eventually led to many mortgage defaults. A hefty portion of these home loans

had been "securitized" and exchanged in the commercial center. In a common home loan upheld

security bargain, any home loan defaults at first influence just the most minimal appraised

tranches. This implies regardless of the possibility that the general default rate for the pool of

home loans is moderately low, the misfortune for a specific tranche of home loan sponsored

securities could be significant. At the point when the financial specialists that hold these tranches

utilize influence, misfortunes can be much more noteworthy.

Financial markets used the market price to note the value of their holdings, however, due to the

decline in the trading activity, they had to use computerized models to estimate their values. This

further led to investors questioning the accuracy of the models. The implementation of the new

market-to-market rule meant that the investors were supposed to report their losses on securities,

even if the did not intend on selling them. This caused the market-to-market mayhem.

Investors soon started to address whether financial markets knew the genuine degree of the
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misfortunes on their books. This vulnerability prompted to sharp decreases in the stock costs of

numerous budgetary firms, and a developing unwillingness to offer for dangerous resources.

As investors endeavored to offer in a market without any buyers, costs fell further. Before

long, most unsafe resources were dropping quickly in cost and frenzy started to crawl into the

commercial center. This marked the beginning of the credit crisis. ("Credit Crisis: What

Caused The Crisis? | Investopedia", 2016)

The impact of the crisis on global economies and financial

markets

The decline in home prices and the consequent collapse of the US sub-prime mortgage

market had a ripple effect on other economies. Because a climate of uncertainty had

developed, business and consumer certainty caved in. Households cut down their purchases

especially that of the manufactured goods. This resulted in the fallout of the global

production industry and the GDP of many economies fell sharply. ("Global Financial Crisis

Global Issues", 2016) The downturn in the G7 economies increased amid the December

quarter particularly in Japan and spread to different parts of the world, including Asia,

Latin America, and Eastern Europe. The Financial Crisis in the developed countries did not at

first influence creating and move economies as the crisis did not start inside their financial

frameworks. It was even hoped that the real economy in the developing nations would escape

unscathed and indeed, even that development in developing nations would sustain the world

economy, as it did in the subsidence towards the start of this century. However, at the point
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when request fell in developed nations, volumes and costs of exports from developing

nations declined. Because the unemployment rate had grown sharply, consumers slowed

down their consumption rates, this, in turn, caused the retail sales to fall and the consumer

confidence to drop. (Edey, 2016)

Furthermore, the homeowners started to file for bankruptcy as they could no longer pay any

debts back as the interests had dramatically increased too. This led to more write-downs and

losses at the banks. Finally, because there were now stricter standards for lending mortgages,

it was now also difficult to get loans for other purposes, such as consumer credit etc. This

further led to the fallout of the retail sales and the financial economies saw a sharp decline.

The economies also saw a downturn in the following ways:

Firstly, banks fixed credit for every other sort of advances. As the credit markets seized up,

many banks that were simple on their loaning principles turn out to be extremely wary on an

assortment of various advances. The private ventures relying upon these advances and credit

extensions to support their everyday operations then get to be illiquid. This leaves

independent companies not able to pay their quick bills, which drives them into liquidation or

bankruptcy.

Secondly, as many firms werent able to pay their current bills, they had to fire many people

causing an overall increase in the unemployment rate.

The previously mentioned financial impacts of a credit crisis can bring about the economy to

go into a descending free-fall that influences the whole country. Once the economy begins

down this way, it gets to be hard to break the cycle. (Seabury, 2016)
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Consequences of the financial crisis in the GCC region

This Financial crisis is global in the sense that it affected all the economies in one way or the

other. Among many affected countries were also the GCC countries. These were mainly

affected through trade and financial markets. By the second half of 2008, GCC government

funds and outside positions were specifically influenced by the decrease in oil prices and

demand. In the meantime, GCC nations experienced inversions of speculative capital inflows

experienced in 2007 and mid-2008. These advancements tightened liquidity conditions and

influenced investor confidence, and were further exacerbated by Lehman's fall in September

2008 and the resulting worldwide liquidity deficiencies and deleveraging. GCC financial

imbalances came into play, particularly in the United Arab Emirates (U.A.E.), Kuwait, and

Bahrain, given these nations' nearby linkages with worldwide value and credit markets. The

financial Crisis led to a sharp decline in the asset prices and credit default swap (CDS)

spreads on sovereign debt broadened. Global liquidity condition tightened and subsequently

slowed down the credit growth and economic activity. This led to the deflation of real estate

prices in most of the countries of GCC. Equity prices too remained at lower levels as

compared to the pre-Lehman collapse. The global crisis had a negative impact on the

financial institutions as well, however, a very moderate impact on its profitability that led to

the defaults of very few non-financial institutions. Nonperforming Loans(NPLs) increased in

many nations, with an outstanding increment in Kuwait because of loan concentration in real

estate, equities, and the investment companies' (ICs) division, notwithstanding critical

misfortunes by Gulf Bank in 2008 (2016). Moreover, in spite of increased risk aversion

among worldwide investors, Qatar and the U.A.E. could raise huge financing on international

bond markets in 2009, to a great extent through sovereign debt issuance. All things
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considered, by end-2009, more than 20 percent of an expected $2 trillion in ventures at

various phases of planning and implementation at end-2008 had been put on hold because of

financing requirements. Real growth in the GCC's non-oil division declined by about half in

2009, to 3.2 percent. The decrease in global oil demand significantly affected oil GDP yield

and, consolidated with lower oil prices, prompted to weaker fiscal and external balances. The

fall in imported food prices and slowly aggregate demandwith its specific impact on rents

caused annual inflation to decrease from twofold digits in 2008 to 3.3 percent in 2009. The

recession had adversely affected new investments incorporating into the hydrocarbon sector.

Besides planned investments in downstream oil projects, a few substantial projects have been

postponed or canceled. ("Press release display page (Middle East)", 2016)

Measures taken by GCC countries to combat the crisis

after-effects

GCC countries bolstered their macro-prudential framework to combat the after-effects of the

global financial crisis. This framework included some measure such as the loan-to-deposit

ratio, controls on individual lending, for example, debt service to wage proportion and limits

on loan tenor, and limits on concentration, including on real estate exposure. (John, 2016)

During 2010, there was significant progress in the financial and corporate sectors. In June

2010, Kuwait Finance and Investment Company signed an agreement to restructure 145

million dinars ($494 million) in debts to local and worldwide banks. Investment Dar has

looked for legal assurance from lenders under the arrangements of the financial stability law

taking after the default on its $100 million Sukuk.

Additionally, in Dubai, DW made critical strides towards the completion of its debt
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restructure. National banks across the GCC have fortified their oversight of the banking

sector and many are directing stress tests to recognize vulnerabilities. The Central Bank of

Kuwait has too begun the way toward enhancing the oversight structure for ICs. The capital

adequacy of banks has been improved in many nations through the infusion of public funds

or private capital. Non-oil economic activity was bolstered by an expansionary fiscal stance.

The priority still remains in the strengthening of the financial sector without constraining the

availability of credit. (2016) In the banking sector, bank capital adequacy is monitored by

periodically reviewing bank asset quality and stress testing. The ratification of the Monetary

Council contract is a critical step towards monetary union. The GCC countries have honed

prudential control by tightening capital and liquidity prerequisites and are actualizing Basel

III standards on capital, liquidity, and influence. Various national banks have built up a

different financial stability office/unit and set up early warning systems. (John, 2016)
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BIBLIOGRAPHY

(2016). Retrieved 23 November 2016, from

https://www.imf.org/external/pubs/ft/dp/2010/dp1002.pdf

Credit Crisis: What Caused The Crisis? | Investopedia. (2016). Investopedia.

Retrieved 23 November 2016, from
http://www.investopedia.com/university/credit-crisis/credit-crisis4.asp?
ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186

John, I. (2016). IMF urges GCC to take steps to ward off systemic risks -
Khaleej Times. Khaleejtimes.com. Retrieved 23 November 2016, from
http://www.khaleejtimes.com/business/economy/imf-urges-gcc-to-take-steps-
to-ward-off-systemic-risksimf-urges-gcc-to-take-steps-to-ward-off-systemic-
risks

Financial crisis. (2016). En.wikipedia.org. Retrieved 23 November 2016, from

https://en.wikipedia.org/wiki/Financial_crisis

Global Financial Crisis Global Issues. (2016). Globalissues.org. Retrieved

23 November 2016, from
http://www.globalissues.org/article/768/global-financial-crisis

Edey, M. (2016). The Global Financial Crisis and Its Effects*. Retrieved 23
November 2016.

Seabury, C. (2016). The Causes And Effects Of Credit Shocks. Investopedia.

Retrieved 23 November 2016, from
http://www.investopedia.com/articles/economics/08/credit-shock-
mortgages.asp
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Press release display page (Middle East). (2016). Strategyand.pwc.com.

Retrieved 23 November 2016, from
http://www.strategyand.pwc.com/me/home/press_media/management_
consulting_press_releases/article/46