Research Essay On International Business Finance: Causes And Impact Of Financial Crisis.

Evaluation of the impact of the financial crisis

Question:

Discuss About The Research In International Business Finance?

The impact of financial crisis is mainly evaluated in the overall assessment, where in depth problems that was faced by countries and companies during the financial crisis is adequately depicted. In addition, performance of the companies during the financial crisis is evaluated and its impact on developed and developing countries also appraised. The assessment also identifies possible causes for the rise of financial crisis during 2008. identifications eventually help understanding the problems and wrong decision taken by the government. Lastly, adequate measures that was taken by governments all the world are also depicted, which would help in understanding its impact on actual economies. The impact of financial crisis on the economic condition of Australia is also evaluated to understand the problems faced by companies during the crisis.

The financial crisis was mainly conducted due to the manipulation delivered by Financial Institutions and banks. There were many causes that led to the rise of financial crisis, as governments was not able to control risk accumulation by banks. Relevant causes depicted as follows, which result then the rise of financial crisis of 2008.

After the regulations passed by US government regarding the fulfillment of American dream, where loans are provided to individuals for their home. In addition, the redline areas marked by banks were removed by the US government, which allowed them to take bank loans for the home. Additional financial institution such as Fannie Mae and Freddie Mac was mainly introduced to convert mortgage and loans into mortgage bonds such as CDO and MBS. Many of these Financial Institutions was created to convert mortgage and loan into financial instruments, which could be traded in the secondary market. Due to the believe that mortgage market will never decline or fall (Allayannis et al. 2017). These instruments were handsomely traded all around the secondary market. However, Fannie Mae and Freddie Mac used credit ratings to determine price of the bones, which were mainly manipulated and was found after the end of the financial crisis. These financial instruments directly allowed banks to accumulate more capital to continue with their operations and provide home loans to individuals.

Relevant boost in interest rates before the financial crisis was an immediate Trigger, which instigated borrowers to default, due to non-availability of funds for repayment. Majority of the borrowers were not financially sound, which resulted in high default rate of borrowers. Hence, it was assumed that borrowers were willing to default rather than pay installment on the loan due to high interest rates. The change in interest rates conducted by FED directly impacted the overall payment amount of the borrowers. During the loan providing us the interest rate laid down by fed was mainly at the levels of 1%, while before the financial crisis it was at 5.25%. This substantially increased finance cost of the borrowers, which was not comprehending with their actual income at the current moment (Amies et al. 2017). This phenomenon raised the level of defaulters in mortgage bonds, which became junk and hampered financial stability of companies holding the financial instrument.

Identification of causes for the rise of financial crisis in 2008

Major cause behind the fall of US economy was mainly led by security funds such as MBS and CDOs, which were complicated enough to fool the investors. The security funds formally created from mortgage bonds that was accumulated by banks for different borrowers. banks providing loan services and accumulated mortgages after which these mortgages were converted to financial instruments, where the securitization directly led to the augmentation of the financial crisis. Mortgage backed securities and credit default swaps other two instruments used in the process of converting mortgages into tradable bonds (Armantier et al. 2015). These financial instruments were the main factor in allowing Financial Institutions to create these instruments in secondary market.  companies depending on Bon payments used the financial instruments to generate a constant return from the investment. However, incremental default read made the mortgage bonds in to junk bond, which were not traded in the secondary market.

There were certain laws implemented by the US government before 2000, which directly controlled was taking capabilities of banks. The termination of regulations such as Glass Steagall Act of 1933 and Commodity Future Modernization Act mainly allowed Financial Institutions require more risk and reduce their cash reserve. Banks after the deregulation mainly accumulated high risk assets to providing loans to anybody who wants a home. This attitude directly increases the chances of default among borrowers, which hampered financial stability of the bank (Benetrix, Lane and Shambaugh 2015). However, the banks were merging the mortgage loans with one another and making them into financial instrument, which was highly traded in the secondary market. These fashion instruments were the main reason behind the fall of mortgage market, which laid the foundation of financial crisis.

After the 2008 great financial crisis there were minor setbacks or recession that are identified such as 2013 and 2016 recession. There is a major possibility for the occurrence of great financial crisis, as the measures taken by countries to reduce negative impact of financial crisis has back fight. Banks did not utilize the injection of taxpayer’s money adequately to support their financial requirements. Instant managers and executives of banks roughly stimulated taxpayer’s money in buying expensive gifts. This mainly prompted cash stagnation within the economy, which could be seen during 2013 recession (Carvalho, Ferreira and Matos 2015). However, the 2016 setback came due to the involvement of Greece who was at the brink of being a defaulter. The country being a default is a major indication of the financial health currently present in world economy. There are certain factors that are evaluated from news which could argument the chance of next financial crisis, authorities did not use adequate measures.

Assessment of possible measures taken by governments

Reducing oil prices can be identified as one of the major factors, which could start the second financial crisis, as oil generating countries are not able to improve their financial position. oil is one of the driving factors of an economy, which supports both manufacturing and production processes. This decline in oil prices indicates the overall reduction in demand from customers, which is hindering actual profitability of all generating companies. The oil sector is relatively large, where maximum of the profits generated by countries has immensely reduced (DeYoung et al. 2015). This reduced price is directly affecting oil producing countries ability to support their death payments, which could result in default and might start another financial crisis.

During the previous financial crisis, the Chinese economy was not affected due to its progressive attitude, which enable the country to experience growth in both manufacturing and production system. However, in recent years due to economic and environmental conditions the Chinese economy has slowed down, which is affecting its capital market (Feldkircher 2014). Therefore, it is estimated by and list that the second financial crisis with start from China, due to its declining manufacturing and production process.

Increment in debt can be seen in majority of the countries, due to the negative impact of financial crisis. Countries to support the expenditure mainly issued by high bearing bonds during the crisis, which they were not able to pay after the end of crisis. This relevant phenomenon can be identified from the actions of Greece which was conducted during 2016.  Greece was on a blink of default, as their expenditure rose immensely in comparison to the revenue generated by the nation (Goh et al. 2015). This this could indicate that countries are acquiring more debt to support their expenditure, which is raising the amount of repayment that needs to be conducted. USA is one of the high debt accumulated country, any chance of decline in payments could start another financial crisis.

The augmentation of financial crisis mainly reduced ability of major countries in supporting their expenditure. During the financial crisis overall economy of US trembled, which forced the institutional investors to abandon the capital market. The mass selling conducted during the financial crisis mainly hampered both Australian as well as other countries. Furthermore, the impact of financial crisis was not restricted to developed countries it also reached developing countries all around the world. Impact of the financial crisis on different economic stated as follows.

Impact of the financial crisis on the Australian economy

The developing countries mainly faced problems regarding mass selling that was conducted doing the financial crisis by foreign direct Investments. Developing countries capital market is mainly focused on the investments conducted by foreign investors. However, during the financial crisis foreign investors mainly sold all the shares in developing countries, which started off selling movement in the capital market. Thus, foreign investors mainly conducted selling to support their actual financial requirements during the crisis, as cash stagnation was present within the economy (Haas and Lelyveld 2014). This directly led to the fall of capital market in developing countries hampered growth and increased unemployment.

The global financial crisis also had in fact of developed countries, as their financial sector was interlinked due to the presence of free trade. Countries such as USA and UK frequently conducted financial agreements and trades on instruments such as CDOs and MBS. This relevant increment in financial crisis directly resulted in default which made these financial instruments junk.  this directly affected the financial sector of developed countries who are dependent on the return that would be provided from mortgage bonds (Helleiner 2014). This directly led to the augmentation of cash stagnation within the financial sector hampered growth of developed countries. The panic during the financial crisis was enough to Trigger selling sphere in the market.

The financial crisis also impacted operational capability of Australia, which directly hampered its economy and decline in growth during the fiscal year. Mass selling and panic investors was the main face of financial crisis in Australia, which declined value of the capital market. the financial crisis had a negative impact on company is present in Australia, who were not able to support growth, due to cash stagnation in the economy. The Australian economy was drastically hit by the financial crisis, which increased unemployment rate and closed medium organizations (Kuppuswamy and Villalonga 2015). The financial crisis directly reduced ability of organizations to support their financial requirements, as adequate revenue was not generated. However, small and medium companies mainly felt the overall financial crisis due to the rise in their interest payments, which force them to default or liquidate.

The financial crisis was mainly dealt by implementing reforms by the government for halting its progress. Government took relevant measures all around the World for reducing the negative impact of financial crisis on their economy. Stimulus packages were mainly proposed by US government which was followed by other government all around the world. This stimulus package mainly held cash injections that was inserted into the marketing, which directly reduced cash stagnation within the economy (Luchtenberg and Vu 2015). Taxpayers money was mainly used in the stimulus package for supporting the banks to increase their cash reserve ratio.

Identification of potential triggers for another financial crisis

The second measure that was taken by the government was restriction on short selling, which was directly conducted to restrict further fall of capital market. This restriction on short selling mainly helped in curbing rapid decline of the capital market, which in turn helped in improving share value of financial sector. The use of credit control and Housing and Economic Recovery Act 2008 was used for reducing the negative impact of financial crisis (Pianeselli and Zaghini 2014).

Conclusion:

The impact of financial crisis and the reforms that was conducted by governments are depicted in the above assessment. the augmentation of the financial crisis was mainly due to no restrictions implemented on financial sector, which allowed Bank to increase the rate of risk involved in their investment. moreover, interest rates side by side before the financial crisis and during the financial crisis also lead to is augmentation. However, measures such as credit control, restriction on short selling, and housing and economic recovery Act 2008 mainly stop the continuity of financial crisis. nevertheless, there is still chance for another financial crisis in future, due to the current debt accumulation conducted by countries.

References

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