The financial instrument been the heart of crisis
In recent years the global has faced many financial crisis. The financial instruments is used to channel the funds. But some time the imbalance of these instruments can cause financial crisis.
the key reason for 1997-98 crisis was sudden shift of market expectation and confidence, the certain factor is the evidence of macroeconomic imbalance of these countries (south korea, Malaysia , Indonesia , Thailand , hong kong , china , Taiwan and Philippines ) was current account deficits , foreign indebtedness. The financial vulnerability of the region was magnified in Asai due to the moral hazard problem , during the liberalization of financial market in 1990s, the return on capital was too low than capital.(specially korea ). The 1982 crisis was begin when most micro economic announced that they are not able to meet their scheduled payments of international creditors.
in 1997 the real state and stock market was drop down and foreign capital inflow fuelled the speculative trends and led the emergence of big losses and corporate , financial sector defaults. The current account deficits resulted in currency collapse of few asian countries in 1997. The GDP rate in asian countries was high in asian countries except than Philippines but in 1996 the growth most countries faced slowdown in growth rates specially korea 7.1% in 1996. the major key elements played a major role in crisis was current account imbalance in asia, before crisis the loan made by bank and non bank firm was bad (low quality loans ) if we calculate the share of non performing loans was relatively high in certain countries (korea -10% , Thailand -13% , Indonesia- 13% Philippines -14% , china-14% ,) as well as the given data also represents the property exposure was very high in given countries along with non performing loans. In asian region the domestic banks were facing difficulty due non performing assets and short term foreign liabilities. The thai financial institutions started bankrupt and depreciation begin by investor panic , raised the burden of foreign liabilities. Same conditions is also applies for the korea also which was thrilled by bankrupts of its large conglomerates.
In 1994 tequila effect or the contagion due to depreciation affected to large extent , while Mexican peso got collapsed where as other currencies in latin America maintained their pegs.
International illiquidity (credit crunch )
The major spectacular aspect of asian meltdown has financial collapse, bank failure resulted in the asian 5 nations, around 16 commercial bank was shut down in Indonesia, in korea near about 14 bank stopped their operation and in Thailand non bank finance company became the reason trouble. The domestic financial institution of ( Indonesia , korea , Thailand ) become default for external short term obligations.
Financial collapse mainly occurs due assets prices, increasing in non performing loans , capital loss due to currency devaluation resulted in bank capital loss. Many bank might be forced to sell their assets to meet the capital adequacy ratio required or IMF. The past crisis is the evidence that the major reason for bank illiquidity is resulted due to vulnerability of financial system. The 1982 crisis was occurred due large capital inflow in the crisis countries. The private borrwing mainly appreciated in the period of time.
Bad policies also have acted as a factor to introduce the crisis in financial world , for example 1994 in mexico and 1997 in asia the government had introduced the surplus or small deficits. From the view of 1982-83 , the latin and asian countries adopted free trade policies which increased the trade ratio to GDP.
Capital inflow / outflow
The evidence proves that the short term foreign currency is the main core and predictor of financial crisis, in the recent crisis the financial institution got fail to roll over this kind of debts, and became a reason for the capital account reversal in asia in 1996-98.
Moral hazard was one of the root in the crisis in asia , the moral hazard within the financial sector was taking place from the beginning and raised the regional vulnerability when the liberalization was under process (1990s) , exposed its fragility directed financial & macroeconomic shock in 1995/97. It effected at 3 levels. Corporate, financial , international level , - the political pressure to keep the growth rate higher and created a tradition of public guarantees to the private sector investments. (direct lending & subsidized). The capital inflow was high but the return on capital was less than cost of capital which is negative symbol, and in that period in korea 7 out of 30 biggest conglomerates been bankrupt. According to literature asian financial &banking sector had been suffering through many difficulties, the weak regulation, lack of supervision , low ratio of capital adequacy , corruption. The high interest rate attracted huge capital inflow and increase the lending process with hope of government guarantee and IMF bailout programme , it increased the short foreign liability and in the end of 1996 it was around more than 50%. Finally capital outflow in 1997 resulted in currency collapsed as well international investor panic.
The moreover commodity prices which had sharp increase 1995 but rapidly fell down in 1997-98 and effected the global economy and disappointed the commodity exporter and took place in recession. Again 2008 it played a crucial role in us real estate market.
The financial crisis which took place in recent global market had rooted from US stock market crash (credit default swaps, collateral debt obligation, mortgage backed securities was the main instrument which played crucial role)in 2008. After dot com bubble burst in 2000 the US market faced recession in 2001. To maintain the demand, federal fund rate declined and low interest rate attracted high demand loan for housing. And (inflation ) and subprime lending took place. Subprime borrowers defaulted at higher rate it resulted in high mortgage defaulted homes. And mortgage houses were not enough to cover the loan money because house price were fell down and US economy faced depression and met collapse due to financial instrument mortgage backed security.
http://www.scribd.com/doc/13571555/Financial-instruments-responsible-for-Global-Financial-Crisis Visited on 02/03/2010
http://www.scribd.com/doc/16921953/The-Financial-Crisis-of-20072009-Causes-and-Remedies Visited on 17/02/10
http://www.scribd.com/doc/13571555/Financial-instruments-responsible-for-Global-Financial-Crisis Visited on 28/02/10
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