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In 2008, the GFC (Global Financial Crisis) significantly affected several economies as a whole. With the help of this essay, the effects of the crisis on the economies especially in Europe (Romania) and Asia (India) will be discuss by understanding the differences and similarities in the varied geopolitical vanguard. Furthermore, it has to be noted that countries with appropriate financial framework and good governance failed to safeguard themselves from the crisis. Hence, observed that even the emerging economies were affected but there were few differences that are intended to be discussed through this essay (Allen & Carletti, 2010). In relation to this, firstly a brief explanation on the global financial crisis provided. It will be followed by a sequence of synopsis and critical reviews in order to understand the effects of GFC on the emerging markets that includes BRIC (Brazil, Russia, India, and China) and few European countries. At the last, few concluding statements that based on various reviews will accommodate this essay. The journals are taken from valid resources that shed light on global financial crisis.
The term financial crisis can be widely applied to a range of situations in which few financial assets suddenly lose a significant part of their nominal value. Since the occurrence of Great Depression, the economy is encountering financial crisis that puts them under immense pressure in the current scenario (Allen & Carletti, 2010). In this assignment, global financial crisis pertains to the global financial crisis that took place in the year 2007/2008. Due to the risk of global recession, the degree of variation in the commodity prices has significantly enhanced and such factor intends to be the biggest provision of developing economies. Therefore, if such a situation continues, these developing economies will fall in the trap of difficulties. Studies have portrayed that financial crisis can create heavy decline in the commodity prices, decline in foreign remittance, degradation in the equity markets, decrease in exports etc. In short, the crisis creates many rippling effect that left the associated countries and nation in utmost problem. The US subprime mortgage crisis that contributed towards the recession of US facilitated in a chain of impacts varying from demolish of various financial institutions, currency crisis, disintegration of the stock market etc. It initiated from the real estate market (subprime) of US and gradually widespread causing immediate effects to other financial markets, thereby marking the downfall of Lehman Brothers in the year 2008 (Heng, 2009).
Therefore, Global financial crisis is regarded to be the most dangerous crisis as per the specialists of economics since the occurrence of Great Depression in 1930. GFC believed to have occurred in July 2007 with the crunch in credit. However, as the stock markets became highly volatile and crashed, the crisis badly worsened by September 2008. This crisis entirely did shook the government’s policymaking system and as the after effects of the crisis were huge, even economists failed to estimate about such devastation (Austin & Bilski, 2008). The tool for negating such a crisis is negligible and it is upon the government to undertake measures that can help to pacify. In short, there was no forecast of such a crisis and left innumerable countries in trouble. However, it must be noted that various financial experts have offered few significant consideration regarding this but the entire system did not take proper measures to adopt such considerations and as a result, they had to encounter such a massive problem (Mishkin & Eakins, 2009).
The US subprime financial crisis resulted in a chain of massive impacts that includes demolishing of financial institutions, disintegration of stock markets, recession in economies etc. It spread from the markets of real estate to other financial markets around the world, thereby leading towards the development of a GFC (Global Financial Crisis). In relation to China, even though the country had the potential to sustain high economic growth, the devastating impacts from the global financial crisis still affected China in such a way that even economists could not have estimated it (Mathai, 2012). The reason to this is that China was amongst those countries that sustained high economic growth consistently, reporting 9.6% growth in 2008, and 9.2% growth in 2009. By this, one cannot predict that a financial crisis can completely shake China’s economy. Moreover, in the year when GFC occurred, a significant decline of 14.2% growth could be witnessed in most of the countries including China.
The crisis spread through various channels. In the beginning stage, financial or economical channels were considered the most relevant. As a result, financial institutions from various countries specifically in Europe made huge investments in US securities associated with its real estate markets. Due to such investments, these investors incurred heavy losses. They established a sudden enhancement in appetite for safe assets relative to risky ones that led to huge outflows of capital from several emerging market economies that pursued little direct connections with the real estate markets of US. Nevertheless, in contrast to this, China proved to be relatively resistant to such effects of capital and wealth flow (Qiaominet. Al, 2016). Furthermore, the rate of FDI in China declined in the initial period of financial crisis but sooner bounced back to an approximately appropriate level in the upcoming period. This is evident from the following graph where it can be viewed that the net FDI of China declined to $121.68 billion in 2008 and $70.32 billion in 2009 respectively. This signifies a decline of 15% and 42% each year but it enhanced to $124.93 billion in 2010 (Qiaomin et. al, 2016).
Even though because of the global financial crisis, the foreign demand for the exports of China significantly declined in the initial stages of the crisis, it sustained high growth during the period of crisis. This means that it fought the crisis and the stability of the policies ensure that the economy remained undisturbed or to a lesser extent. In the year 2010, the economy of China bounced back with a GDP growth of approximately 10% performing better than all the other significant economies (Silvennoinen & Thorp, 2013). A slight declined can be witness in the year 2011 but on a whole, the economy of China still pursues huge potential for development.
Because of an exceptionally good rate of growth even during the global financial crisis, China has embarked an innovative discussion round on decoupling hypothesis. Studies provide that while the immediate growth of economies like India, China, and Brazil has significantly maximized their leverage on the countries in their geographical locations, credence in an equivalent decline in such leverage of emerging economies were highly exaggerated (Silvennoinen & Thorp, 2013).
The impact of global financial crisis on the advanced economies including India afterwards was primarily through rowback of portfolio flows of capital because of untwisting of position of stocks by FIIs to refill foreign cash balances. Pullout of FII investments led to the disintegration of stock markets in various emerging economies and decline in local currency value in relation to US Dollar because of imbalances of supply-demand in the local markets. In relation to India, the degree of rowback of capital flows reported at US$15.8 billion during February – January in the year 2008 in response to termination of positive shock in January (Mankiw & Taylor, 2011).
Because of downfall of Lehman Brothers in the year 2008, there arose a fully-fledged breakdown of the international financial markets. It generated a confidence crisis that resulted in inter-bank market seizure and pursued trickle-down effect on financing of trade in the advanced economies. In addition to decelerating international demand and contraction in commodity prices, it also resulted in export reduction, thereby imparting crisis of the financial sector to the real economy. Countries with export-oriented industrialization or growth such as in various South-East Asian countries and the ones that relied on commodity exports were affected more (Viney, 2009). Countries that are associated needs were affected in a worse manner as the crisis was intense in nature and created deep trouble.
Due to lesser reliance on the export markets and the truth that a substantial benefaction to Gross Domestic Product is from local sources, the effect on Indian economy was less devastating in comparison to others. Since 1991, the trade reforms of India have proceeded continuously towards impartial regime for imports and exports, thereby rejecting export incentives and tax (Samarakoon, 2011)).
The average payment situation balance remained flexible despite pressure indications in capital account that substantiated in the total rowback of FII flows of US$15 billion during 2008-2009. Moreover, during such period, the merchandise exports witnessed 13.6% growth and reported at US$189 billion. Indirect effects affected the credit and money markets through vigorous relationships. The liquidity dry up, squabble of repatriation of FII’s portfolio investments, impacted credit markets in the next half of 2008-09. The risk aversion policy of banks played a key role in worsening this situation. The banks completely failed to put the risks at bay and this lead to immense issues in the system (Samarakoon, 2011).
The amount of external monetary or economical shock on the monetary financial system of India can be measured by sheer shrinkage of more than 15% in the reserve money betwixt August and November 2008. The increment in reserve money diminished from 26.9% in August 2008 to 10.3% in November 2008. In March 2009, it further declined to 6.4% respectively. It was observe that the credit dependence increased immensely. The deposit ratio enhanced from 55.9% in March to 72.5% in March 2008. Moreover, the foreign capital outflow was cheaper in nature. Moreover, there was a strong increment in borrowing rates of interbank (Stijn et. al, 2010). For example, between June and December 2008, the investment dropped significantly indicating that the customers want to put their deposit in a place where the deposits are safe.
During the period 1990-2009, oscillations in the economic growth of India were not associated to the series in developed countries. The significant rise of India’s growth betwixt 2003-04 and 2008-09 nevertheless seems to correspond with an indistinguishable increment in OECD and international growth. The vast growth decline to 5.8% in the next half of 2008-09, in addition to the international and US financial breakdown in 2008 appears to assist this observation (Allen & Carletti, 2010). This indicates that the financial crisis affected the functioning of the nation in terms of growth rate. The associated states and countries bound to be affected because the financial crisis is transmitted quickly between the associated states. In response to the global recession, analysts viewed that growth in developing countries and advanced economies was controlled by related capital flows, commodity demand, and global excess monetization (Allen & Carletti, 2010). Developing countries should have important tools that should aim to reduce the intensity of the crisis so that the difficulties are diminishing.
The emerging or the developing nations remain undisturbed by the global financial crisis and this is due to various factors. Various facts can be cited in this regard. The institution was not vulnerable to the instruments of the US and hence proved to be in little danger. Some of the companies tried to strive for balance by transfer of the wealth as it was transferring wealth considering that it is an element of foreign investment. Beyond question, India remains undisturbed by the GFC because there was little exposure when it comes to CDOs. Moreover, the steps taken by RBI proved to be a great support like the assessment of credit-debt ratio, enhancement of the capital adequacy ratio, assessment of non-banking financial companies, prescribing rules for management of asset-liability and assets securitization (Viswanathan, 2010). On the other hand, China witnessed a huge slump in the growth rate even considering the fact that the economy was reporting a growth rate of 9.6% in 2008 and 9.2% in 2009.
Therefore, it can be comment that there are similarities in the economies that are emerging. India affected marginally as contrast to China that was affected badly. The financial system plays a vital role in structuring the economy.
Allen, F., & Carletti, E. (2010). An Overview of the Crisis: Causes, Consequences, and Solutions*. International Review of Finance, 10(1), 1-26.
Austin, R. P. & Bilski, A. Y. (2008). An Introduction to the Conference Themes in The Credit Crunch and the Law. London Press
Cahill, D & Stilwell, F. (2008). The Sub-prime Credit Crisis Could It Happen Here? Accessed September 19, 2016 from http://www.ampcapital.com.au.
Heng, S. K. (2009). The global financial crisis: impact on Asia and policy challenges ahead, pp
267-274.
Mankiw, N.G & Taylor, M.P. (2011), Economics, Andover: Cengage Learning
Mathai, K. (2012). Monetary policy: stabilizing prices and output, International Monetary Fund.
Mishkin, F.S & Eakins, S.G. (2009). Financial markets and institutions. Australia
Qiaomin, L, Scollay, R & Maanic, S. (2016). Effects on China and ASEAN of the ASEAN-China FTA: The FDI perspective. Journal of Asian Economics, 44, 1-19
Samarakoon, L.P. (2011). Stock market interdependence, contagion, and the U.S. financial crisis: The case of emerging and frontier markets. Journal of International Financial Markets, Institutions and Money, 21(5), 724-742
Silvennoinen, A.& Thorp, S. (2013). Financialization, crisis, and commodity correlation dynamics, Journal of International Financial Markets Institutions and Money, 24(1), 42-65
Stijn C.M, Kose, A & Terrones, M.E. (2010). The global financial crisis: How similar? How different? How costly?. Journal of Asian Economics, 21(3), 247-264
Viney, C. (2009). McGrath’s Financial Institutions, Instruments and Markets. Sydney
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