Lessons Learned From Global Financial Crises (GFC) And Asian Financial Crisis (AFC) Essay.

1. What was the situation in respective countries/region before the occurrence of the GFC and AFC
2. What went wrong
3. How did they recover from the crises
4. What lessons can we learn from these two crises.

Situation prior to GFC and AFC

Asia showed remarkable resilient in the face of the GFC and its output performance remained stronger compared to other regions. Before the GFC, Asia had a better initial condition in terms of lower external as well as financial vulnerabilities. These contributed significantly to Asian resilience. The main pre-crisis variables in Asia entailed moderate expansion of credit, dependence upon deposit-funding, improved bank-asset quality, decreased external financing as well as enhanced current accounts relative to other regions. Such improvements manifested in the lessons AFC during late 1990s that assisted Asia redesign private sector behavior and public policies (Rethel 2010).

For instance, various countries stepped up corresponding utilization of the macro-prudential policies long before they were acknowledged as the necessary constituent of the financial stability toolkit. These countries further overhauled financial regulations alongside strengthened oversight of the financial institutions that helped in the reduction of the risk-taking by the household alongside firms prior to the GFC.

Looking into the future, Asia stays in the course of adjusting to increasingly volatile external situations as well as higher risk-premiums.   Asia drew effective lesson from the pre-GFC and will stand better equipped to speak to the newfangled risks linked to escalated cross border flows of capital besides superior integration with entire globe (Rethel 2010).   

Asia remained resilient because of its better conditions relative to other world economies in the course of the GFC saves to lesson that had been learned from the AFC. The policies of macroeconomic in Asia remained solid as it approached GFC; however, it remained accurate for several economies at the crisis’ epicenter. The regions had shared qualities including low inflation, fiscal surplus, and trivial deficits with an exception of Greece, alongside public debt that remained hugely beneath 60% of GDP. Such indicators remained not exclusively auspicious in Asia relative to the entire globe. Accordingly, whereas trustworthy alongside reliable policies of macroeconomic remained essential to back a steady economy, they singly stood inadequate to explicate cross economy diversities in pliability in course of the GFC. Resilience of Asia anchored on its relatively low financial as well as external vulnerabilities saves to the decade of Asia’s structural and financial reformation subsequent to AFC.

The prevalent US subprime loans default in the year 2007 culminated in a key crisis (financial) which spread over to the Asian region as well as entire world. With the conditions of liquidities swiftly deteriorating towards the end lapse of 2008 October, banks alongside additional financial institutions at center of the global-financial system trimmed back corresponding stances foreign. This forced asset-fire-sales alongside the credit-lines withdrawal globally. Financing trade immediately dehydrated up as the global demand leaped. The key developed economies ground to a stop in 4^th quarter of the year 2008. Asia besides the remaining globe faced a sudden drop in production in resultant worldwide credit crux.  

What Went Wrong in GFC and AFC

The initial consequences of the GFC evoked the shock that had overwhelmed Asia solely ten years down the line. The flow scale of capital failure in the real activities in the late 2008 remains as huge as the one witnessed in course of AFC. AFC resulted in the full-blown  financial crunch in Malaysia, Korea, Thailand, Philippines alongside Indonesia coupled with a sudden corporate as well as bank deleveraging thereby leading to substantial contractions in output, besides business failures, unemployment as well as poverty.

Nevertheless, at the same time, the outcome in Asia remained unique from a decade down the line and from additional identical economies. No full-blown financial catastrophe in Asia or sudden damaging external modifications were witnessed. Asia remained comparatively irrepressible and managed to reserve systemic steadiness whereas euro region met its nastiest economic as well as financial calamity in history alongside additional main established economies fought back to recuperate their foothold.  Various economies like Australia, China and Indonesia sustained growing in the course of GFC whereas economies saw the preliminary sheer drop in production, like Singapore, Korea alongside Malaysia recorded rapid alongside robust recoveries.

The GFC hit the Asian economies in two ways. The capital escaped region as the banks’ cross-boundary claims on Asia dropped by 15% amid 3^rd quarter of 2008 and 1^st quarter of the year 2009. It roughly doubled the decrease witnessed in additional areas as exceeded drop experienced in the course of worst of AFC. Deleveraging remained typically undertaken by banks in Europe in and out of euro region decreasing corresponding consolidated claims in almost all economies in Asia.

Exports further fell amid 2008 and 2009 September alongside February respectively making exports to plummet by 30%. This remained comparable to the drop witnessed in other regions, and thrice additionally severe than in the course of AFC. Industrial output for increasingly export reliant nations like Singapore, Hong Kong SAR, and Malaysia alongside Thailand remained abruptly stumpy. Huger economies that were non export reliant like Australia, India, China and Indonesia witnessed a small drop. Accordingly Asian output shrank wholly for 2 consecutive quarters of 2008 and additional eight percent in the 1^st quarter of 2009, on the annualized terms.   

To effectively mitigate the shock that followed the GFC, Asia for example, swiftly embraced both monetary- alongside fiscal stimulus. The low-inflation alongside the administration obligation, fiscal surpluses and trustworthy monetary policies implied that several economies in Asia were capable of mounting a decisive as well as all-inclusive countercyclical policies reaction. Aggressive monetary-easing via policies rates and reserve requirement cuts, huge fiscal-stimulus packages that amounted to 3-5% on the episodically adjusted terms alongside the unparalleled actions undertaken by the Central Banks made sure that financial-systems had sufficient liquidities as well as support thus served in the mitigation of the crises’ paraphernalia.

Recovery from GFC and AFC

The above responses saw the Asian exports as well as economy commencing to revive beginning March 2009. Strong competitive stances in certain instances aided by depreciating exchange rates alongside vigorous import demand in Asian area, especially in China, assisted drive Asian region exports to overhead the pre-crunch levels by 2^nd quarter of 2010, 3 quarters ahead of complete recovery of the worldwide trade. By the end of 2010 alongside through year 2011, Asia remained propelling the worldwide recovery, the initial period that Asian influence to worldwide recovery had surpassed that of other areas. Simultaneously, rates of unemployment remained controlled as well as solely in NZ did such rates surged substantially, by around 2.50%.   

Inflows of capital further swiftly reinstated. Within merely 6 quarters, BIS reporting banks’ cross border claims on Asia surged from the trough in the initial period of 2009 to a novel high in the 2010 late, much shorter compared to a ten-year that Asia took to recover from the AFC. By the close of business 2011, global cross-border claims of the global banks on Asia had hit a novel high despite claims on other regions of globe still ten percent lower compared to level at pre-crisis (Khoon and Lim 2010). Korea was the solitary economy with claims staying around 20% beneath its pre-crisis level; however, this indicated a decreased dependence of banks on overseas wholesale funding subsequent to the implemented macro-prudential measures to rein in overseas currency risk.

Asia had learned from AFC that financial inequities in the banks alongside companies were able to become a peril to the entire macroeconomic immovability thereby hovering awareness of Asia close correlation, as well as the need for financial segment reformation for reducing major susceptibilities. Policy makers in Asia subsequently assumed an additionally pre-emptive as well as exhaustive method to the supervision of banking thereby making sure that idiosyncratic risks remained closely monitored besides spoke to, whereas making use of macro-prudential instruments as response to erupting systemic risk in financial sector (Jeasakul, Lim and Lundback 2014).

In fact, Asia remained ahead of several other economies in the deployment of instruments like limitations on loan to value, credit growth, debt to income, and restrictions on currency alongside maturity mismatch alongside the modifications in reserve requirements as well as riskier weights for the containment of the excessive financial imbalances caused by the crises.

It is also equality significant to note that a shift towards a more flexible exchange rate acted an effective shock absorber in the face of the crises. For instance, Asia’s financial segment remained non-extremely leveraged or reliant on comprehensive funding for its development as well as supposed as well-regulated (Abidin and Rasiah 2009).

Thus it is important to imitate Asia’s responses by moderating expansion of credit alongside decreasing leverage in the financial systems to the level which remains more reliable with fundamental of economy, improving asset-quality in banking scheme, maintenance of a more maintainable balance of current account thereby containing dependence on overseas funding, besides accumulating sufficient foreign reserves to cushion a sharp capital inflows reversal coupled with active utilization of macro-prudential policies.   

References

Abidin, M.Z. and Rasiah, R., 2009. The global financial crisis and the Malaysian economy: impact and responses. Kuala Lumpur: UNDP Malaysia.

Jeasakul, P., Lim, C.H. and Lundback, E., 2014. Why was Asia Resilient? Lessons from the Past and for the Future. Journal of International Commerce, Economics and Policy, 5(02), p.1450002.

Khoon, G.S. and Lim (Mah-Hui.), 2010. The impact of the global financial crisis: the case of Malaysia. Third World network (TWN).

Rethel, L., 2010. Financialisation and the Malaysian political economy. Globalizations, 7(4), pp.489-506.