The recent financial crisis is the worst to have taken place since the 1930s. Though several crises have occurred in the past (for example the 1980s and the 1990s financial crises), the one between 2007 and 2012 was the worst to have hit the economies of several countries across the globe. Many analysts have labelled it as the second Great Depression since 1930. The crisis caused financial havoc all over the world such that no single country was immune to the effects (Black 2009, p.11).
Some of the largest financial institutions in the world collapsed rendering many people jobless. It is noted that not only did banks collapse but also the stock market was shaken to its very core. No single business entity was spared, not even the mortgage institutions that were evicting people from houses after failing to meet their mortgage obligations. Many people remained unemployed for a long time. The losses resulting from the financial crisis on the part of the consumer amounted to trillions of US dollars. The growth of many world economies either came to a standstill or reduced resulting to a recession in the year 2008 (Reinhart &Rogoff 2008a, p.396).
Well known financial institutions like the Lehman Brothers went bankrupt. This was one of the most shocking bankruptcies in American history. The causes of the Lehman crisis were linked to the continued investment on the mortgage market which was doing well before the crisis. This bank was the fourth largest banking institution in the United States. Its crumble is believed to be the source of the recent crisis that affected all banking systems and especially those that were attached to it.
In this paper, the group is going to look at the recent global financial crisis and its effects on the Arab economy, especially the region’s banking sector.
The Rise of the Recent Global Financial Crisis
The financial crisis originated from the United States of America (late 2007) when the country was experiencing erratic valuation and liquidity problems in the banking sector and other financial institutions. In the US, the market liquidity was so widespread such that the dollar was affected even outside the US market. The banking institutions felt that the assets would be sold in the market without influencing the prices. In addition, the banks did not envisage losses as the entire process was thought to be part of an economic boom that was referred to by some economists as post modernism (White 2009, p.23).However during the process of market liquidation, the major currencies such as the US dollar were affected negatively after the bonds were withheld by other countries such as China and the United Arabs Emirates. This is together with other developed nations that made it impossible for US to sell the assets thereby deflecting the market liquidity process (Lowy 2009, p. 11).
The US government and other concerned parties argue that the crisis was not in any way a natural disaster. On the contrary, they are of the view that the crisis emanated from the pronounced economic risks and the already existing conflicts that had not been fully resolved. Others contend that there existed a complex banking system and many other such factors that were not conducive for economic growth. The complex banking system was evidenced by the inaccurate rating of mortgages. This was an indication of the failure of controlling agencies to put in place regulatory measures to control the international market in the 21st century. The problem was largely evident among Wall Street banks as well as other deposit banks in the country. Efforts to recover from the crisis are under way with some regulatory measures put in place to mitigate its consequences (Reinhart &Rogoff 2008b, p. 400).
We can generalize here by saying that the regulators in the banking industry were becoming increasingly worried about the increased risk taking by the financial institutions. The institutions were generating income from fees which were not appearing on the balance sheet but nevertheless expose the bank to risk.
The Recent Economic Crisis: Background Information
The history of the recent crisis can be traced back to early 2000 when the lending patterns of housing institutions increased. The increase was characterised by easy loans given to many people to either buy or build their own homes. This resulted to a sharp increase in home prices in the country. In the long run the US Federal Reserve interest rates went down as the home prices went up. Foreign funds that accumulated in the market further fuelled the increase in home prices and the crisis started crouching in. The crisis was further motivated by increased debt finance utilisation which eventually ended up as a housing bubble (Holland 2008, p.39).
The piling up of the bubble effects instigated the volatility of more credit-offering institutions leading to a situation referred to by analysts as financialization (Holland 2008, p. 38). Matters were made worse by the fact that the US government had reviewed its stand on the developments and operations of banks and other financial institutions in an attempt to deregulate business operations so as to spur growth. This resulted to enhance internal activities on the part of the banks that later exploded to cause the crisis (Reinhart &Rogoff 2009, p. 95).
Causes of the Recent Financial Crisis
This practice was rampant among lending institutions that offered enticing credit facilities leading to risky loans. The easy credit plunged many people into a pool of debts from which they were unable to pull out. It was a ‘bait and get’ scenario in which the industry promoted the cheap and easy credit products especially for mortgage funds. Cheap rates resulted to a negative amortization on the part of the consumers who did not understand this at the time of borrowing. It was only after the loan was repaid that the consumer realised that the interest was actually higher than they have been led to believe (Holland 2008, p.31)
Deregulation Lead to Integration and Competition
Economists have harshly criticised the regulation protocols that were supposed to check the rapid financial innovations. The innovations were growing at a very fast pace and the regulatory authorities could not keep up with it. This contributed significantly to the recent crisis that rocked the world. For instance shadow banking and such other activities led to unconventional business activities (Jameso 2006, p.49).
Emerging business enterprises operated on poorlaws that were reviewed in order to cater for partisan and personal interests. Furthermore, the legal system that controlled the financial sector was weakened and it could not check the progress of the crisis (Aizenman & Parischa 2010, p.29).
Deregulation was integrated in the banking system as a result of the continued encroachment of banking services with regard to the bubble that was in high demand. Other mechanisms were integrated in the system in an attempt to control the crisis but the move made matters even worse. The integration was not strong enough to stop the crisis from taking place. The crisis had taken root and the efforts to turn back the events were of little or no help (Jameso 2006, p.51).
Easy Credit Facilities
Financial lending institutions introduced low interest rates which encouraged consumers to take up more loans. This was partly attributed to the Federal Reserve Fund which lowered its target rates in an attempt to avert the collapse of the housing bubble. In the long run the state was accumulating a lot of debts held by consumers whose rate of repayment was very low (Truman 2010, p.38).
Complex Financial Innovations and Processes
The increased innovations by the financial institutions were aimed at meeting the needs of the clients. The innovations were so complex and as such hard to manage. This automatically led to the financial crisis. For example the adjustable rates of mortgage as well as the mortgage backed securities were major contributors to the crisis. The operations in the financial market were carried out by many players making the process more and more complex. Efforts to deal with the innovation complexity were ambiguous and unable to note any potential risks that were in the offing (Mason 2001, p.47).
Incorrect Pricing of Risks
This arose after marketing authorities failed to submit accurate accounts regarding incremental compensation for the investors. To this end, the accounts were inaccurately made and in some cases the results were fraudulent. The widely used global financial pricing criteria were not well understood and occasionally misleading accounts were given. The investors used the wrong figures to increase their investments only to find out later that they were investing in a pool of financial crisis that was incorrectly accounted for (Moschella 2010, p.49). This is well illustrated by Dubai’s financial crisis as well as the current financial meltdown in Greece. The two have in one way or the other denied the investor access to accurate accounts of the actual deficit. The group will discuss this in detail in the next chapter.
Incorrect Economic Forecasting
The experts supposed to predict such a crisis failed to carry out their duties accordingly. They misjudged the looming crisis by regarding the boom as the ‘great moderation’. Although some economists predicted the looming crisis, they were largely ignored and even ridiculed by mainstream economists. The debate on how to address the situation dragged on until the crisis finally set in. It was too late by then to come up with measures to adequately address the situation.
The Spread of the Crisis Across the Globe
The spread of the crisis from the epicentre (read the US) to other countries in the world was fuelled by the fact that the global market links one country to the others. The interconnection between the global market (including the financial markets as well as the major global investment institutions) and the United States of America was the major cause of the spread. The crisis exploding from the US inevitably affected most of the economies in the world. The spread of the crisis has negatively affected the other economies across the globe. The extent of this effect depends largely on the level of integration and competition of a single nation into the world economy as well as the magnitude of policies and regulatory practices in a given nation. All the same, the effects were felt across the world given that all the activities as far the economy is concerned were interwoven with the economy of the United States (Mayer 2008, p.91).
The Global Financial Crisis and the Arab Economy
The Arab world was not immune to this effect. Before the crisis the Arabia authorities had assured investors from overseas that the country is the safest place to invest as the economy was not likely to experience any form of crisis. The Arabians were considered as emerging economies at the time. Their dreams to become major world economies were almost shattered by the crisis.
Effects of the Crisis on the Global Economy
The effects of the crisis on the developing nations practically brought to a halt their economic growth. Such countries experienced one of the worst economic drawbacks in recent history. For example Cambodia whose economy was growing by up to 10% was reversed to less than one percent annually. Most of the countries had to review their daily transactions as well as investments to try and stabilise the economy (Edwards 2009, p.231).
Although the Arab world was less affected by the recent economic crisis, the phenomenon meant a lot to them as an economy. It had to safeguard its territories to prevent the crisis from crossing over. This strategy was not very effective since the Arab world cannot cut its links with other investors in the world completely. The Arab countries averted some effects of the crisis by avoiding the market in early 2008. This enabled the Arabs to make preparations to deal with the crisis early in advance. It is no wonder then that the crisis did not affect them much. As of today it is not clear how the financial crisis occurred or where it started to spread. The effects on the global economy were enormous instilling fear among investors all over the world (Cassell 2003, p.192).
The Impact of the Financial Crisis in the Arab World
The group has discussed in detail how the crisis started in the US with the subprime mortgage as well as the burst of the real estate bubble that plunged the whole world into the crisis. The Arab economy was unable to handle the income as well as the investment plans. This resulted to a destabilized economy especially after the global financial crisis. This is significant given the fact that the financial crisis was spreading fast to places that were not linked directly to the United States in terms of global trade (Arab Business Bulletin [ABB] 2009).
Initially, the Middle East posted a respectable rate of economic growth and was a confluence of global investors due to its potential as an economic hub in the world. Many opportunities for economic growth were realised in the Middle East. For example the region was liberalised creating more incentives for the foreign investor. The Arabian nations are not affiliated to the World Trade Organisation. Their contribution in the world economy amounts to only 2.5% of the total. The only factor that makes the Arab world to be involved in the global economy is the oil industry. This isolation has been very significant to its economy and it is one of the reasons why the crisis had less impact in the region. This is as compared to other economies that are fully integrated into the global financial market.
Despite the crisis and the region’s position, the economy can still accommodate huge investments with few if any losses. The infrastructure put in place as a result of the oil industry has shielded the economy from losing its capacity.
The impacts of the global crisis in different Arab countries vary on the basis of the country’s links with the international trade. But, all in all, the effects of the crisis were significant especially in the stock market where the region posted a decrease of about 50% (ABB 2009). The Gulf Cooperation Council (herein referred to as the GCC) has adopted several strategies to respond to the crisis which has left the economy badly shaken. To maintain the liquidity as well the stability of the stock exchange markets the GCC had to shield its members from being harmed by the global financial crisis.
The fact that the region is characterised by a heterogeneous cultural outlook makes it complex and difficult to be directly affected by the crisis. The region is experiencing a decline of the local market in areas such as the tourism sector and other sectors such oil which are part of the global market. Different sectors are suffering from the crisis in different ways given their varying internal stability. This is due to the fact that the country is so much dependent on hydrocarbons as an export and the global market for its products is not stable. As a result the income from this commodity has reduced significantly (ABB 2009).
The region however is in a stable position following the significant growth of its economy spurred by the current oil boom. The crisis struck just after the region had acquired huge assets as well as resources to counter the envisaged global crisis. The economists had warned of a decline in the growth of the economy in the future. But in spite of these negative predictions, the region has posted a steady growth of about 4% annually which is more than most countries in the world can achieve.
Though the effects of the crisis in the region were largely unnoticed, the story is different in various parts of the Arab world. For instance the United Arab Emirates was noted to be advancing economically with an annual GDP (Growth Domestic Product) growth of approximately 15%. But the International Monetary Fund has reported a sharp decrease in this growth which currently stands at about 2% (International Monetary Fund [IMF] 2009, p.1).
Impacts of the Crisis on Economic Performance
Few countries in the region posted a negative economic growth while others exhibited a stagnant economic progress. According to a report by the IMF it was noted that generally economic growth was positive in the Arab countries (IMF 2009). Growth was fuelled by the initiative from the oil producing countries to reduce the daily oil output due to the decreased international prices. To safeguard the economy, oil production was to be reduced to maintain growth (Cassell 2003, p.147).
As the group noted earlier, the impact of the crisis in the Arab world was not as detrimental as it was in other countries in the world. Although this was the reality on the ground, the countries in this region were affected by high rates of unemployment and poverty. The International Labour Organisation (ILO) estimated that the Arab countries posted an increase in unemployment rates as a result of the recent financial crisis. The figures from ILO state that unemployment rates in the Arab world range from 11-15% even though the Arabian labour report cites it to be much higher than this.
Channels of the Crisis into Arab Countries
The global financial crisis found its way into the Arab countries through many channels. Some include financial markets which were the major avenues through which the region became part of the world financial crisis. The markets in the Arab regions reported increased investment due to enhanced flow of revenue from their exports. Financial sectors and the housing corporations are some of the major players in the Arab stock markets which suffered as a result of the global crisis. The crisis affected return on investments that were made in the previous years. As a result the firms resolved to sell off their shares in the stock market leading to defaults by the local banks (ABB 2009).
Other channels through which the crisis entered the Arab world include oil export. The demand for oil in the world market went down drastically and price for oil also slightly reduced. This took place as each country was trying to cut down on oil expenditure. Exporting oil was so expensive and Price decreased and this caused a reduction in the oil revenue for the Arab countries. Conversely, with the crises in place, this did not give Arab a chance to sell its oil market effectively. Other channels that caused the crisis to cross over to the Arabian territory include the non oil exports such as tourism and remittance which played a big role in bringing down the economic growth in the region.
Response of the Arab Governments to the Crisis
The Arab governments adopted several strategies to counter the effects of the 2007-08 global crises. This included tough regulatory measures that were directed towards financial officers to protect the economy and make sure it stabilizes. This was meant as both a short term and long term measure. Other strategies on the same include fiscal as well as monetary regulatory procedures meant to mitigate the huge losses that were incurred as a result of the crisis. It was also meant to make sure that the economy remains immune in the future (Blustein 2007, p.49).
The initial policy to counter the effects of the global crisis was to put the commercial banks in a suitable position. This was to ensure that the stock markets remained strong as to continue offering credit as well as liquidity. This is because the stock markets are the first to experience economic distress during a crisis. There was therefore the need to shield the stock markets not only in the Arab world but also in other parts of the world.
Commercial banks were to be supporting by increasing deposits to safeguard the local as well as the international market. However, not many countries had adopted this policy. The deposit guarantees were substantial and many governments intervened by depositing sizeable funds with the commercial banks (Calomiris 2008, p.142).
Fiscal stimulus was one of the major policies that were seen to bear fruits since they were started immediately after the crisis. For instance, those countries that exported oil embraced this idea than those that imported the commodity. Saudi Arabia was the first among the many countries to implement this strategy which saw an increase in government expenditure even with low oil revenues. Fiscal stimulus varied from one country to the other depending on the economic strategy adopted by each country (Calomiris 2008, p.143).
Financial Crisis in Dubai
Dubai has an international market established a decade ago under the Dubai Financial Market (DFM). This market became the second largest in the world in trading securities and bonds. The market has performed well both locally and internationally. Since then DFM has remained at the top, venturing into tourism and business oriented markets. This was evident when it posted a 95 billion US dollar trading share in the fourth quarter after it was launched (Haas 2006, p.99).
The Dubai market has depreciated as a result of the recent global crisis leading to a significant downturn. Dubai businessmen had made huge investments across the globe and they liquidated their investments only to incur losses. Though some of the properties in the market had depreciated before the crisis, this was amplified when the crisis set in. The market experienced huge losses with a total debt of about $7,400,000. Dubai was perceived as an economic hub that drew investors from all parts of the world. The country is not largely associated with oil and natural gas extraction but it has solely relied on mega business enterprises (Haas 2006, p.98).
The developments in the Dubai economic sector have been linked with the recent crisis that hit the entire world. This is so because Dubai is dependent on business and tourism ventures and most of the investors are drawn from foreign countries. Dubai has a huge stock investment in the international market and all these factors put together linked the country to the origins of the GFC worsening the debt crisis.
Explanations for the Dubai Crisis
Dubai is an Arab country that does not depend entirely on oil exports. On the contrary, it is largely involved in other business enterprises as well as tourism. The business entrepreneurs are drawn from many countries across the globe and they invest in the complex building industry. They are also involved in sophisticated infrastructure and the international hotel industry and many others including the Palm Island. This attracted international institutions who invested heavily in the country (Moschella 2010, p.92).
What took place during the Dubai crisis can actually be explained by the government which asked those who had invested in the country to scale down their operations until after the financial crisis. In the real sense Dubai was assuming huge debts but it failed to admit this to the investors. Some years back Dubai borrowed from its neighbour Abu Dhabi about $80 billion US dollars to reform its now magnificent transport network. Up to now Dubai has huge debts to pay but this factor is not taken seriously by the authorities. This however is hurting the interests of the financiers. This had negative impacts on the investors not forgetting the fact that there are other countries caught up in a similar situation. This is for example Greece and Spain which the group is going to discuss later. All these factors had dealt a blow on the confidence of investors from around the world (ABB 2009).
Dubai debts are expected to be paid by Abu Dhabi. The latter has helped the former before in similar situations. It is to be noted that this is not the first time for Dubai to enter into such a crisis. But this time round, the debts are substantial for Dubai to bear alone as compared to others incurred in the past. However with the help of Abu Dhabi Dubai might come out of this debt crisis.
Effects of Dubai Debts on Real Estate and Mortgage
The effects of the crisis on Dubai real estate were huge. The crisis that occurred between 2007 and 2010 brought investments in the real estate sector to a standstill. This is after six years of positive performance on the international scene. So far the property market has suffered huge losses as its performance declined (IMF 2009).
The effects of the crisis resulted to the laying off of over 10,500 employees working in the real estate market. Most constructions in estates and other buildings were stopped or cancelled as a result. Some of the established hotels were said to be empty most of the time with no occupants as the news about the debts hit the international market (ABB 2009). Other bubble effects were evident with the fleeing of investors while potential investors shied away from Dubai.
The effects of the crisis have resulted to tough regulatory measures put in place to govern the real estate and mortgage industries. Many banks are reluctant to offer funds for mortgage facilities due to huge debts incurred in Dubai. Other legal frameworks to regulate the same have been put in place. This is for example the requirement that any mortgage lending should be conducted by a specified and registered agent as well as other financial institutions.
At this point, the group will shift the focus of the paper to explore other crises facing other nations in the world. This will provide a full and detailed analysis of the problem. This is together with suggestions on how the same can be rectified in the future. Adequate measures need to be put in to consideration when handling financial crises. To avert such crises in the future, a detailed study of other countries is needed to provide a long lasting solution (ABB 2009).
Greece, Spain and the Global Financial Crisis
Focus on Greece and the Financial Crisis
Greece has being embroiled in problems ever since it joined the Euro community. Despite this development, the economic woes of the country more than doubled. Greece was not prepared at all for the recent global financial crisis and this plunged it into a huge debt crisis with debts that were not paid for. This has negatively affected the economy of the country which has continued to deteriorate. The huge debts have led to economic slowdown and made the economy to be become unproductive. To make matters worse, Greece is facing a threat of being evicted from the Union (Joicy& Pickford 2011, p. 59).
Every sector of the country’s economy was negatively affected. The residential real estate market suffered greatly with prices dropping drastically. Big cities which were supposed to post large volumes of transaction were not spared either. The plans to pull the country out of the crisis are complex and ambiguous as the government has pleaded with the European nations to intervene. The government is expected to convince the union by adopting drastic measures so that it can qualify for a loan. Even with the bailout funds, the country’s economy will still take time to recover fully from the impacts of the crisis. The boom in the housing market ended after the crisis set in. Since there have been little or no hopes to recover from the situation. This is especially so given the fact that the Greek problem is deeply rooted. It is no wonder then that the country was left out of the Euro community in the year 1999. It was expected to sort out its deficit before being integrated into the Euro zone. It was not until in 2001 when this happened after the country fudged the figures so as to join the Euro zone (ABB 2009).
To this date, Greece is still involved in this mess and the proposed solutions to bring to an end the crisis have not been effective. For the country to control increase of the debts, it has to cut back on its spending while at the same increasing the tax to relieve the debts.Austerity measures must be taken (in order to tighten the belt).
Focus on Spain and the Financial Crisis
Spain on the other hand had symptoms that are more or less similar to those of Greece. The country too had a huge housing boom but now it is frantically fighting its way out. Spain has a smaller deficit as compared to that of Greece that is actually proportion to that of its gross domestic product (GDP) (Mayer 2008, p.27). The problems in Spain are synonymous to those of the United State financial crisis. The country is the fourth largest economy in Europe and the Euro zone is concerned by the developments. There are efforts to save the country from multiple crises emerging from the same community. This is the Portugal, Iceland, Italy, Greece and Spain (herein referred to as PIIGS) community. These countries are struggling as a result of numerous crises. But this group is going to restrict themselves to Spain and Greece as members of the euro zone (Robinson 2008, p.9).
Unemployment in Spain has shot up to about 24% postulating another recession in less than three years time. Inflation is evident and it is affecting expenditure by the consumers. This concerns European plans have been made to take action and make sure that the economy does not collapse. These are efforts aimed at safeguarding the Euro currency. One of the strategies that the Spanish government was planning to adopt was to create a bad account. This was to help in separating the assets that are spoilt from the normal financial system.
Economists contend that the country is too strong to fail and if it fails it is too large to rescue since it wields significant influence in the continent. It has been noted that it is borrowing more than expected and it is headed for a bailout. The economy of the country is in depression and potential rescuers perceive that taking the country out of the depression will plunge it into more complications. For instance Spain is in the process of adopting austerity mechanisms to help reduce its deficit and in the long run, the situation might become worse (Mason 2001, p.29).
The Role of the Arab World in the Greece Crisis
The Arab world had a significant role to play in the crisis that hit Greece as an economy. The group discussing this paper had earlier discussed how the Arab world especially Dubai has properties in the world, which are listed in the London Stock Exchange. With the persisting crisis in Greece as a whole, the earnings on the properties in the country were reduced.
Europe as a continent played an important role in the Arab world’s foreign market. Most of the Arab countries had business ties with Europe. The latter was struggling to save the currency from collapsing by intervening in the crisis emanating from the economies of the Euro zone. This is after it was realised that if the situation was left alone and the currency collapsed, the value of the properties will go down. Arab nations were therefore concerned with the financial crisis unfolding in Greece as a member of the Euro zone (Pizzo et al. 2009, p.39).
Greece was dragging Europe into the crisis and if this trend was to continue, the Arab world would have lost its market for oil. This is one of the reasons why Greece bailout is major concern for the Arab League. (Pizzo et al. 2009, p.57).
Savings and Loan Associations Crisis- the 1980s and 1990s Crises
Like the recent global financial crisis, the 1980s and 1990s crises started in the United States. The idea of building projects originated from Britain as a building society towards the end of the 18th century. America adopted the idea in the form of Building and Loans (B&L) that was used by employees in different companies to save for future (Edwards 2009, p.34).
Crises that were commonly referred to as the S&L associations crises were as a result of the 1986 Tax Reform Act. The enactment of this act did away with tax shelters even those targeted at real estate investments. In the long run the value of such investments went down. This brought to a halt the boom in the real estate housing sector leading to the infamous savings and loan crisis of the 1980s. The S&L was subjected to the same regulations as the banks, which led to the collapse of the institution. Economists referred this to as a moral hazard as the banks were given less credit than the S&L institutions (Reinhart &Rogoff 2009, p.39).
The consequences of the crisis were similar to those of the recent crisis between 2007 and 2012. Banks failed to deliver as others were closed down. More than 1600 banks were affected, some closing down and others being bailed out by the federal deposit insurance account. Other than the banks, the S&L institutions were reduced from 3234 to 1645. This resulted to a reduction in family mortgage funds from 53% to 30%. The actual cost of the crisis was approximately $160.1 billion (Cassell 2003, p.42).
Comparison between the 2007-2012 Crisis and the 1980s- 1990s Crises
The two crises are seen to have the same epicentre. All of them started from the United States of America. The previous crises were not as bad as the recent one (Reinhart & Rogoff 2009, p. 79). This is because the crises did not affect critical financial sectors in the world market. The crises did in fact shake the foundation of several economies in the world, but the impact was not as pronounced as that of the recent crisis. It is also clear that the recent crisis was a result of failure to meet moral obligations just like the other crises in which the lenders were encouraged to give out loans that were not regulated. This increased the risk of financial institutions around the world.
Both of these crises reduced the number of homeowners significantly. For example: in the earlier crisis homes construction decreased from 1.8 million to less than 1 million. The decrease as a result of the recent crisis was however higher than this. Most crises have resulted to the formation of various agencies to strengthen the economic policies in attempts to avert future crises. Some of these agencies or groupings include the G20 and the G7 countries. At this juncture the group is going to discuss the role of the above mentioned groups in detail.
G20 and G7 Countries and the Recent Financial Crisis
These groups play a significant role in the world economy ranging from that of economic watchdogs, regulating trade, formulation of macroeconomic policies and fostering positive relations with emerging economies. The G7 is made up of those countries with the most advanced economies in the world which are Canada, Italy France, Germany, Japan, UK and US. Their participation in the global economy is important as it informs the formulation and implementation of strategic policies touching on the global economy (Financial Stability Board [FSB] 2011).
G20 on the other hand is a composition of industrial and emerging market nations which holds annual forums to discuss the stability of the global economy. On the face of the recent crisis the G20 held forums to foster international cooperation in resolving the issue. The G20 countries represent 80% of the global gross national product. As such they play a significant role in global economic cooperation. The group influences the world financial system and played a significant role in formulating the strategy that was initially proposed by Canadian prime minister. However, the group is yet to replicate the achievements of the G7 alliance (Hajnal 2009, p.28).
The groups held several summits to discuss the recent crisis. Key financial institutions noted that many nations were not properly represented in the global economic activities. The groups hold summits twice a year to report on the global financial developments (Ariyoshi et al. 2009, p.83). The recent summit was held in Washington DC and future summits have already been scheduled to take place in Mexico later this year. Other summits also take place in other parts of the world for example the BRICS which encompasses Brazil, Russia, China and South Africa. The countries meet to address the same problem.
Basel Accords and the Financial Crisis
Basel I and II
An agreement about banking official from industrialized nations set up the Basel comity under the auspices of the bank for international settlement in Basel, Switzerland which has helped in making Basel I and II. These are the first Basel Accords that were put in place before the recent financial crisis took place. Basel II Accord is based on three major operating pillars. The pillars touched on minimum capital requirements, supervisory review and market ethics. Basel I touched on some aspects of these three pillars but not all of them. For instance, on Basel II’s pillar one, Basel I addressed credit risk but without the tough regulations. The operation risks were addressed in Basel I Accord (Calvo et al. 2006, p. 90).
Despite the effects of the 2008 financial crisis the country is still using the faulty banking criteria, which have caused a huge drop in the GDP. Basel has deviated from the provisions of the accord in protecting the consumers from the effects of improper banking systems. The criteria are pushing down the economy by creating increasing the rates of unemployment (Aizenman & Parischa 2010, p.93).
Banks which are incompliance with Basel are expected to operate below their current accounts to conform to the new global regulations put in place to safeguard the interests of the depositors. The effects of this on the depositors are significant and tough measures have been put in place as a result. This is for instance the liquidity ratio which has been used to check the lenders capacity to protect the banks from collapsing (Calvo et al. 2006, p.87).
Basel III has improvised this to check the banking systems in other parts of the world in efforts to counter the effects of faulty banking systems. It provides an opportunity for all banks to prosper in the future. It has formulated plans for risk management in case of future crises. The group will discuss Basel III in detail in the next section.
This is a globally recognised regulatory agency that controls the banking system in the world. It is the third of the Basel accords that were formulated and signed in response to the recent financial crisis. It came up with strong measures to support standard banks across the globe. Bank regulatory and bank leverage is the main concern of Basel III. This is after new measures were introduced to govern these two areas (Calvo et al. 2006, p.93).
The risks that were associated with Basel II have been addressed in Basel III. The aim is to protect the banks from potential risks experienced in the previous Basel. The United States integrated the provisions of Basel III into the banking system as well those financial institutions holding assets valued at over $50 billion. This is due to the fact that the US is interlinked with other international traders and a slight deviation will affect the entire global economy hence the need to adopt the Basel III regulations.
Basel III requires all banks to possess a 4.5% of common equity as opposed to Basel II which required only 2% of common equity. In addition to this, Basel III requires the bank to hold a 2.5% capital buffer which will enable it to hold liquidity ratios that are equivalent to net cash flow (Calvo et al. 2006, p.103). If the Basel strategy is applied on the Syrian banks, it will diminish the effects of the crisis that is taking place in the country. Although the deadline ends in 2011, the Basel Accords will discourage many banking institutions from operating within the stipulated rules and especially the Syrian banks.
The International Monetary Fund (IMF) and the Recent Global Financial Crisis
IMF is an international organisation that was formed in the year 1944.A number of states applied to be members of the organisation. The organisation is currently managed by Christine Lagarde. One of its major functions includes surveillance of the global economy. The recent crisis posed a challenge to IMF as far as responding and formulating appropriate policies was concerned. The organisation made efforts to protect the economic interests of emerging markets and most importantly, it regulated the international exchange rates (Blustein 2007, p.81).
The IMF responded to the global crisis by ensuring that resources are disbursed to member states to try and get them back on track (IMF 2009). Other functions include the identification of systematic crises so that the economies are prepared well enough to avert damages. Market confidence is the major concern of IMF. This is to make sure that the international market does not ruin the world’s financial system (Augusto et al. 2007, p.29).
IMF faced several challenges in addressing the recent crisis. First the resources were not adequate to fund the US and her financial constraints. The emerging markets such as the Arab economies were clamouring for balanced foreign rates applicable to the third world countries (Calomiris 2008, p.47).
IMF found itself in an awkward situation when it tried to resolve all the member states’ economic and financial crises (Pareto 2009). This shifted the main goals of the IMF creating a need for critical dimensions to respond to the issue. It has to prevent future crises from affecting the global economy. The organisation has resolved to respond to the financial crisis by designing long term reform measures grounded on international financial markets (Ghosh et al. 2008, p.49).
Recommendations and Conclusions
The United States has an obligation to make sure that financial institutions adhere to the stipulated regulations to avert such a scenario in the future. The international business and stock markets are interconnected with the US and a slight deviation from the regulations may plunge the global economy into another financial crisis. Apart from providing technical support to the international financial system, the IMF has an obligation to formulate and enact policies defining boundaries for the international financial system.
The Basel Accords on the other hand needs to review the provisions to make sure they address potential crises that may strike the world. All the banking systems need to be regulated under the Basel accords to promote banking operations that are not a threat to any economy. The Basel Accords should have realistic requirements to encourage all large banking institutions to enrol and adhere to the guidelines.
The G20 as well as the G7 groupings had a role to play in the financial crisis. The dominant economies as well as the emerging markets are at risk if they implement faulty economic regulations. Monitoring agencies should be put in place to oversee the operations of the banking systems across the globe and immediate measures taken to respond to a crisis.
Crises need to be closely monitored before their effects hit hard. Oversight frameworks should be enacted across the globe to oversee the performance of various financial institutions to prevent fraudulent operations that would land the economy into a crisis. It is noted that major economic crises emerge from countries with large economies and this being the case, the financial sector needs to be scrutinised not to deviate from the provisions of financial ethics.
Aizenman, J & Parischa, G 2010, ‘Selective swap arrangements and the global financial crisis: analysis and interpretation’, International Review of Economics and Finance, vol. 19 no. 1, pp. 353-365.
Arab Business Bulletin 2009,The effects of the recent global crisis on the country’s economy, Arab Business Bulletin, Dubai.
Ariyoshi, AK Habermeier, B Laurence, I Otker-Robe, J Canales-Kriljenko, A &Kirilenko, A 2009, Capital controls: country experiences with their use and liberalization, International Monetary Fund, Washington, D.C.
Augusto, L Augusto, R Samans, N & Uzan, M 2007, The international monetary system, the IMF and the G20 great transformation in the making, Palgrave Macmillan, Basingstoke.
Black, K 2009,The best way to rob a bank is to own one, University of Texas Press, Austin.
Pareto, J 2009, The world economy and the accompanying crises, Free Press, New York.
Blustein, P 2007, The chastening: inside the crisis that rocked the global financial system and humbled the IMF, Public Print, New York.
Calomiris, CW2008, ‘The IMF‘s imprudent role as lender of last resort’, Cato Journal, vol. 17 no. 3, pp. 22-29.
Calvo, GA Izquierdo, A & Rudy, K2006,‘Relative price volatility under sudden stops: the relevance of balance sheet effects’, Journal of International Economics, vol. 9 no. 1, pp. 231–254.
Cassell, M 2003, How governments privatize: the politics of divestment in the United States and Germany, Georgetown University Press, Washington.
Edwards, F 2009, ‘Hedge funds and the collapse of long-term capital management’, Journal of Economic Perspectives, vol.13 no. 2, pp.189-210.
Financial Stability Board 2011, Progress in the implementation of the G20 recommendations for strengthening financial stability: report of the financial stability board to G20 finance ministers and Central Bank governors, Free Press, New York.
Ghosh, AB Joshi, J Kim, U Ramakrishnan, A Thomason, J Zalduendo, S 2008, IMF support and crisis prevention, International Monetary Fund, Washington D.C.
Haas, PM 2006, ‘Introduction: epistemic communities and international policy coordination’, International Organization, vol.46 no.1, pp.1–35.
Hajnal, P 2009, The G7 system and the G20: evolution role and documentation, Ashgate Publishing, Aldershot, Hampshire.
Holland, D 2008, When regulation as too successful- the sixth decade of deposit insurance, Greenwood Publishing Group, London.
International Monetary Fund 2009, World economic outlook, International Monetary Fund, Washington DC.
Jameso, H 2006, International monetary cooperation since Bretton Woods, Oxford University Press, London.
Joicy, N & Pickford, S 2011, The International Monetary Fund and global economic cooperation, Ashgate Publishing, London.
Lowy, M 2009, High rollers: inside the savings and loan debacle, Praeger, New York.
Mason, D 2001, From building and loans to bail-outs: a history of the American savings and loan industry, 1831-1989, State University Press, Ohio.
Mayer, M 2008, The greatest ever bank robbery: the collapse of the savings and loan industry, Scribner’s Sons, New York.
Moschella, M 2010, Governing risk: the IMF and global financial crisis, Palgrave Macmillan, New York.
Pizzo, S 2009, Inside job: the looting of America’s savings and loans, McGraw-Hill, New York.
Reinhart, C & Rogoff, K2008a, ‘Is the 2007 U.S. subprime crisis so different? An international historical comparison’, American Economic Review, vol. 98 no. 2, pp. 339–344.
Reinhart, C & Rogoff, K 2008b, ‘Banking crisis: an equal opportunity menace’, National Bureau of Economic Research Journal, vol. 91 no. 2, pp. 392- 410.
Reinhart, C & Rogoff, K 2009, This time it is different: eight centuries of financial folly, Princeton University Press, Princeton.
Robinson, M 2008, Overdrawn: the bailout of American savings, Dutton, New York.
Truman, E 2010, Strengthening IMF surveillance: a comprehensive proposal, Peterson Institute for International Economics Press, London.
White, L 2009, The S&L debacle: public policy lessons for bank and thrift regulation, Oxford University Press, New York.