The current global financial and economic crisis began in 2007 in the markets of the industrialized countries due to the disproportion between production and consumption. The American economy became its homeland because it was in the real estate sector of this country that the crisis arose. Still, because of the high degree of globalization of the financial market, it gradually struck the entire economy of the country. The negative phenomena observed in the United States in the context of the high level of interdependence between all participants in the world market could not help but bypass other countries.
This crisis has been equated by many experts and scientists with the global economic catastrophe of 1929-32, as it has affected almost all countries of the world, and trillions of dollars measure the losses from its negative impact. The economies of some countries are still unable to recover from the effects of the recession. Today, they are in a vulnerable post-crisis state, which requires the country’s leadership to make innovative operational decisions in the economic sector to restore lost positions and ensure sustainable economic development.
The financial and economic crisis of 2007 – 2009 has engulfed the real economy and has adversely affected the development of all countries. According to Godley et al. (the number of losses suffered by bank shareholders from the crisis during 2007-2008 exceeded $ 690 billion). (5) The decline of the world’s national wealth under its influence has halved (from $ 107 to $ 50 trillion). The problem of the crisis has become the most widespread topic of public-political and business media, many analytical and social-scientific publications in the world in general (Godley et al. 5). Thus, the challenge of overcoming the effects of the financial crisis became apparent.
The functioning of the banking system in times of crisis is characterized by an increase in liquidity, currency, and other risks arising from the massive outflow of funds. The degree of impact of the crisis on the economy in general and banking, in particular, depends on several factors. Still, the primary consideration is the state of the banking system in the pre-crisis period. It is about banks’ liquidity position, how much their liabilities are secured by equity, what is the quality of the loan portfolio, how effective is the bank’s management. Thus, the financial crisis highlights those imbalances of the banking system that are unnoticed during the economic boom, are ignored.
However, the financial crisis of 2008 – 2009 has dealt a severe blow to the global economy in general and the banking system. Experts highlight the many causes of the emergence and spread of crises in the world. The main ones are:
- the strong dependence of countries on the international financial market. Complications in 2008 of access to (cheap money in world markets have led to disruptions in the work of several large banks, which in turn has provoked panic in depositors and has led to a significant narrowing of the domestic resource base) (Helleiner 71). As a result, local banks practically froze lending to households and non-financial corporations, which led to a decline in solvent demand and further undermined the banking system’s resource base;
- the disproportion between financial and industrial capital;
- faster growth of consumer lending over investment. The share of loans to individuals exceeded the loans of non-financial corporations three times, and the percentage of investment loans did not exceed 20%. (In the two pre-crisis years, the volume of loans to individuals increased 5.6 times) (Acharya et al. 100). In such circumstances, the banking system has virtually shied away from investing and has not secured reliable sources of expansion of its resource base. The rapid increase in lending to households above their potential only contributed to the increase in imports but did not ensure economic growth domestically;
- the outflow of speculative capital from several countries and the devaluation of world currencies;
- increase in external debt;
- a critical decrease in the degree of deposit coverage of banks’ resources. While in 2005 the coverage of deposits with loans was safe – 92.6%,( in 2008 it decreased to 60%) (Acharya et al. 100);
- inconsistency of terms of filling the resources of banks with the conditions for which they provided loans to individuals and legal entities. (Banks borrowed funds under 4.5% pa for up to 5 years and borrowed them at 12% for up to 10 – 20 years). (Acharya et al. 100) This imbalance caused the collapse of the banking system’s liquidity.
- significant dollarization of operations. (More than 50% of credits in the national economy were issued in foreign currency) (Acharya et al. 100). The real gap between the loans and household incomes in the context of inflation has increased the value and cost of debt servicing, which has led to the emergence of the problem of defaults and has led to a disruption of the banking system;
- the weakness of legal protection of creditors’ rights;
- inefficient credit standards;
- low level of coordination of monetary and fiscal policy.
According to various experts, all indicators of development and the ratio of groups A and B, which have been preserved since the pre-crisis economy, show both the low productivity of the world industrial production and competitive economic losses. (The focus of production on the domestic consumer and injuries in the income themselves also declined the financial performance of several countries) (Garcia-Appendini and Montoriol-Garriga 285). Consumers’ indicators such as the control of national wealth, monopolization, shadowing, and capitalization of stocks can also cause serious concern. When the crisis is at the stage of completion, analyzing its effects, it can be identified that the two main groups of macro- and microeconomic factors that have become the driving force behind this negative cyclical economic phenomenon were:
- the reasons for microlevels include the exposure of commercial agents to excess risk, which was triggered by a long period of economic growth and macroeconomic stability and weak risk management at the level of market participants;
- Among the reasons for the macro level are the ineffective regulation and supervision of the financial market, inconsistent macroeconomic policy, lack of structural reforms.
The dynamics and the course of the recession in each country had their peculiarities, but the phenomena of the same nature were observed. For example, (production cuts were tracked in the US, Japan, the Eurozone, and most OECD countries, where figures ranged from 4 to 7%) (Cecchetti 54). At the same time, the leading non-OECD countries cannot avoid a significant slowdown in economic development or recession.
Overall, (global GDP in real terms fell by 2.75% in 2008) (Cecchetti 54). According to statistics, the economy of the OECD countries has been in the deepest and largest recession in the last 50 years during the period of active crisis development. The crisis has become a phenomenon of a global nature, and therefore for its termination, the coordination of actions of all participants of the world market became a necessary condition.
Since the crisis was purely chronological, it first appeared in the financial and banking sectors. Hence, the first response to the crisis was the “traditional” reduction by the central banks of the interest rates and provisions for commercial banks. This is the path chosen by the US, EU, and Japan, since the beginning of 2008, (the US Federal Reserve has lowered its interest rate seven times from 4.5 to 0–0.25%) (Goodhart 305).
(The Bank of Japan decreased its base interest rate from 0.5% at the beginning of 2008 to 0.1% at the end of 2008) (Goodhart 305). The Bank of England lowered its rate five times during 2008 from 5.25 to 2%, and as early as March 2009, it was 0.5%. (The ECB rate changed from 4% in early 2008 to 1.25% in April 2009) (Goodhart 305). China should also be added to this list, which shifted from a tight monetary policy announced in 2003 to a more lenient one and began to gradually reduce interest rates and provisioning rates for commercial banks to stabilize lending to the economy.
However, some countries have responded in another way, for example, Europe has faced the problem of large-scale capital outflows and the need to spend large amounts of money to service foreign currency loans, so during 2008, the EU Central Bank raised the refinancing rate (from 10 to 13%) to reduce the devaluation pressure on the currency by these factors. It can be traced that the significant assistance from the states was directed to the financial sector.
This is because the stability of the financial system, which is often compared to the circulatory system of the human body, is one of the necessary conditions for creating a healthy environment for the development of all types of businesses, and accordingly – creating new jobs, improving living standards, etc. Therefore, in all national anti-crisis programs of the states, much attention was paid to the financial market.
The volatile economic situation in the countries characterized by rising inflation, mutual defaults of commercial entities, which led to a decline in production and economic slowdown, played a significant role in exacerbating the crisis in the financial and investment sector. The volatility of currency and securities rates, the considerable disproportion of state budget revenues to its expenditures, and the excess money supply in the country’s turnover also had a negative impact. Besides, the overall situation was exacerbated by unbalanced government policies. As a result of these and other factors, (some countries’ GDP decreased by 15.1%, industrial output – by 21.9%) (Goodhart 307). The highest rates of decline were recorded in the first half of 2009.
Due to the rapid increase in the number of problem loans, almost all banks stopped lending to the economy – (the volume of the loan portfolio decreased by 2.7%, and lending to individuals decreased by 14%) (Goodhart 308). The banking system’s profits in 2009 had a clear negative trend. Given the current situation, world governments and banks have been forced to take several measures aimed at achieving the following objectives:
- ensuring the stability of the national currency with the help of interest and currency policies;
- support for the liquidity of the banking system;
- reduction of demand for foreign currency through the introduction of foreign currency auctions for borrowers;
- Reducing speculative pressure on the foreign exchange market through instruments of administrative influence.
In the initial stages of the implementation of anti-crisis measures, significant efforts were directed to support the liquidity of the banking system. The most troubled banks were re-capitalized, and restrictions were introduced on the use of household deposits by banks where the interim administration was introduced.
The global financial crisis has impacted mainly through three directions. The first is foreign trade. (The high dependence of developed economies on exports, which accounted for 47% of GDP in 2008, harmed the dynamics of export production, and further on in sectors that are directly and indirectly dependent on exports) (Erkens et al. 400). The second is the banking system. (The share of foreign capital in financial institutions today is still quite high then) (Erkens et al. 400). (The financial sector is one of the leaders in attracting foreign direct investment (19% of total accumulated foreign capital) (Erkens et al. 401). In the banking sector, the share of foreign capital in the total amount of capital was 37.2% and exceeded the economic security threshold by 30%) (Erkens et al. 401).
In comparison, in the insurance sector, it was close to this limit and was 28.1%. The third direction is debt. (At the end of the first half of 2008, gross external debt amounted to 59.9% of GDP, or $ 100.06 billion) (Erkens et al. 403). (At the same time, almost 85% of the debt reached the private sector. According to studies conducted by the IMF, the maximum permissible amount of external debt for low- and middle-income countries is 49.7% of GDP; if this level is exceeded, the probability of financial crisis deployment is 70%) (Erkens et al. 403).
In 2010, the international financial market regulator focused on the exchange rate, inflation, and volumes of individual monetary aggregates. As a result, the global economy has managed to get out of the acute phase of the financial and economic crisis and move on to the post-crisis recovery phase. The main positive changes in the area of monetary regulation, which were made possible by the implementation of sound fiscal policy, are the following:
- reduction of speculative demand for foreign currency and stabilization of the exchange rate of different currencies
- reduction of inflationary pressure in the consumer market;
- improvement of the performance of the banking system (increased regulatory capital of banks, reduced level of loss of banks);
- acceleration of growth rates of funds on accounts with banks, – resumption of lending.
In the US, it is forbidden to pay top management fees from government funds, and tight controls by the Fed, Treasury and the Deposit Guarantee Corporation (FDIC) over the areas of use are imposed. In the UK, banks need to enter into a so-called lending agreement with the government to obtain financial resources from the government, (which provides for individual volumes and types of obligatory lending to consumers and businesses) (Vyas 847). In France, a unique institute of “Credit Ombudsman” has been set up to monitor the use of state aid by banks and the transparency of business access to credit.
Almost all countries have implemented several measures to protect the interests of deposit-holding individuals. To this end, (Europe has introduced a 100% refund on bank deposits of up to EUR 700,000) (Barberis 5). The United States has implemented a full deposit guarantee of up to $ 250,000 to protect the interests of citizens and small businesses. An essential element of anti-crisis programs in many countries has been the promotion of mortgage lending and assistance to homeowners who have purchased loans.
An analysis of the experience of banks’ pre-crisis activities makes it possible to draw the following conclusions and recommendations for the future. First, (the credit policy of banks should be closely monitored by the state) (French et al. 292). Secondly, a minimum of borrower solvency requirements should be set to diminish the interests of credit managers. Third, it is not possible to practice foreign currency lending to borrowers who do not have income in that currency. Fourth, the state should monitor and lend more closely to the credit activities of banks and non-banking financial institutions. Fifth, it is necessary to ensure an increase in the presence of the state in the banking system and a decrease in the latter’s dependence on foreign capital. Sixth, it is advisable to focus significant efforts on restoring positive expectations on the part of depositors and investors of banks. Seventh, coordination of actions of public authorities and economic entities should be ensured.
The economic crisis during 2007-2008 has shown that the dependence of economies on each other can be disastrous regarding global events and changes. The financial disturbances during this period indicated that each country should have several countermeasures to secure budget, income statements, and currency devaluation. In return, the absence of these measures only complicated the situation in 2007-2008, making an economic crisis devastating for several countries even today.
Thus, one way out of the crisis is to create a creative, knowledge-based economy, the central core of which is a mutually beneficial strong partnership in the state-business-science chain, which should become a new growth point. Innovative breakthroughs need to be sought not only in areas where there is enough potential in countries, such as aviation, shipbuilding, space technology, but also in an industry that is technologically backward but has tremendous potential for development – namely, in agriculture. It should be noted that during the crisis, the agrarian sector of the economy was least affected.
Given the scarcity of financial resources, it is necessary to determine the competitive advantages of the country and start building a new economy, built on getting rid of its raw materials orientation, using a mechanism that provides cross-industry competition and flow of capital from one industry to another, the recovery of production and targeted engineering renewal of fixed capital. It is necessary to incorporate a new model of social policy into the mechanism of economic growth, which should become one of its economic driving forces.
The financial crisis has become a challenge for the whole world, drawing attention to the issues of corporate governance, risk management, operational management. In the context of a high degree of globalization, coordination, and development of a flexible international mechanism for regulating the processes taking place in the world market is required.
Acharya, Viral, et al. “The Financial Crisis of 2007-2009: Causes and Remedies.” Financial Markets, Institutions & Instruments, vol. 18, no. 2, 2009, pp. 89–137. Web.
Barberis, Nicholas. “Psychology and the Financial Crisis of 2007-2008.” SSRN Electronic Journal, 2011. Web.
Cecchetti, Stephen. “Crisis and Responses: The Federal Reserve and the Financial Crisis of 2007-2008.” Vol. 23, no. 1, 2008, pp. 51–75. American Economic Association. Web.
Erkens, David H., et al. “Corporate Governance in the 2007–2008 Financial Crisis: Evidence from Financial Institutions Worldwide.” Journal of Corporate Finance, vol. 18, no. 2. 2012, pp. 389–411. Web.
French, Shaun, et al. “A Very Geographical Crisis: The Making and Breaking of the 2007–2008 Financial Crisis.” Cambridge Journal of Regions, Economy and Society, vol. 2, no. 2, 2009, pp. 287–302. Web.
Garcia-Appendini, Emilia, and Judit Montoriol-Garriga. “Firms as Liquidity Providers: Evidence from the 2007–2008 Financial Crisis.” Journal of Financial Economics, vol. 109, no. 1. 2013, pp. 272–291. Web.
Godley, Wynne, et al. “Prospects for the U.S. and the World: A Crisis That Conventional Remedies Cannot Resolve.” SSRN Electronic Journal, 2009. Web.
Goodhart, C.A.E. “Lessons from the Crisis of 2007/8.” Journal of Financial Stability, vol. 4, no. 2008, pp. 305–306. Web.
Helleiner, Eric. “Understanding the 2007–2008 Global Financial Crisis: Lessons for Scholars of International Political Economy.” Annual Review of Political Science, vol. 14, no. 1, 2011, pp. 67–87. Web.
Vyas, Dushyantkumar. “The Timeliness of Accounting Write-Downs by U.S. Financial Institutions During the Financial Crisis of 2007-2008.” Journal of Accounting Research, vol. 49, no. 3. 2011, pp. 823–860. Web.