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The Financial and European Economic Crisis 2008 – 2012 Cause and Effect Essay


Introduction

Global financial crisis which too place in 2008-2012 was the worst financial crisis of the time which can be compared to the great depression of 1930’s only (Dick 2009). This global crisis is also known as the great recession or the late 2000s financial crisis due to the timing of its occurrence and its overall implication. This crisis had a negative impact on different sectors of the economy.

For instance, in the housing sector, it resulted in foreclosures, several evictions, and a widespread unemployment levels. In the financial sub sector, it caused several collapse of major financial institutions; down pricing of several stock market prices. It also resulted in the declines in billions of consumer wealth and failures in businesses due to decline in the overall economic activity.

This crisis was not a natural disaster but was initiated complex factors. For instance, in the United States, it was caused by banking sector liquidity and valuation problems which occurred in 2008.

Specifically, the problem was necessitated by the failure of regulators and credit rating agencies to correct predict the situation, complex and high risk financial products, unrevealed conflicts of interest, open-minded application of Gaussian copula function and the failure of effective tracking of data provenance.

The opponents argue that credit agencies failed to correctly price the mortgages related products while the governments were also rigid in relaxing the regulatory practices in order to adequately address the financial challenges of the 21st century. This caused the value of securities linked to the housing to rise causing a lot of havoc to the financial institutions.

The fall in the value of securities were partly attributed to the low confidence from investors, bank insolvency and decline in credit availability. Such events as decline of the trade in the international market along with the extreme tightening of the credit led to the quite predictable consequences, one of them is the lowering of the level of the economic development in the global perspective.

To correct such adverse situation, several governments employed different fiscal stimuli programmes, institutional bailouts and monetary expansion policies. This slowed the rampaging crisis which ended between the year 2008 and 2009.

European economic debt crisis

The European economic debt crisis is a financial problem which made it hard for Euro zone member states to refinance their government obligations without any third party assistance (Dick 2009).

This situation started from the end of year 2009 due to fear amongst investors as a result of rising government liabilities around the globe coupled with the downgrading of countries liabilities in some European states. By the end of year 2000, European finance ministers accepted a rescue plan valued at 75 billion sterling pounds to offer financial stability.

To restore confidence in the euro zone and prevent the collapse of economies, several attempts were also proposed. The first step was the acceptance of the universal fiscal union by all states, one of the conditions was that each country was obliged to put in action a balance budget amendment.

The second necessary condition for all banks was that all of them agreed to accept a 53.5 percent write off agreement to debts owed to private creditors in Greece and finally, an agreement was reached to expand the European Financial Stability Facility by 250 billion pounds with an additional requirement of 9 percent capitalization set on all European banks.

This resulted in stabilization of most European economies while others like Greek, Portugal and Ireland which constitute almost over 6 percent of the Euro zone’s gross domestic product were still left behind. However, during this period, the regional currency remained stronger against many currencies and trading partners. This crisis was caused by a multiple of complex factors.

First, it was caused by the easy credit conditions of 2002-2008 which encouraged high risk lending and borrowing practices amongst banks.

Globalization of finance, real estate bubbles resulting in high prices, slow economic growth of 2008, fiscal policies choices of government revenues and expenses, diverse strategies employed to bail out troubled financial institutions and private bond holders and assuming private debt burdens.

Finally, other schools of thought argued that, the problem was necessitated by a pool of savings gathered between 2000-2007 periods which overwhelmed regulatory mechanisms. Apart from the Euro zone, the global crisis lowered the level of economic development in other countries of the world. In this paper, we will focus on the Australian banks.

Table 1: Interest income and operating expenses of National Australian Bank

2006 2007 2008 2009 2010
Interest income (Million $) 14.6 15.4 16.9 8.2
Operating expenses (Million $) 15.23 7.4 7.3 2.4
Variation in interest income 0.28% 8.30% 5.80% 9.70% -3.30%
% changes in cost 4.98% 0.90% -2% -2.40%

Source: National Australian Bank (2006; 2007; 2008; 2009; 2010;2011).

It is true that the European debt crisis have had a negative impact on the Australian banks. For instance, in the above table, it is clear that from the crisis period, the profitability of National bank of Australia have recorded a negative profitability levels.

This has shown a steady increase from the 2007. The company recorded a negative interest income of 3.3 percent to settle at 8.2 million US dollars from 16.9 million US dollars in 2009. However, during the same period, the operating expenses recorded a decrease.

Table 2: Cash return on Equity

2006 2007 2008 2009 2010
Cash Return on Equity 17.70% 17.10% 14.30% 11.90% 12.90%

Source: National Australian Bank (2006; 2007; 2008; 2009; 2010;2011).

The National Australian bank return on equity has been below the 20 percent mark for the current period under study. During the crisis of 2007-2008, the return on equity of this bank dropped drastically for the high of 17.1 percent to 14.30 percent representing an almost 3 percent drop.

This drop was also witnessed after the crisis in 2009 where the mark reached its lowest level of 11.9%. However, by the end of 2010, return on equity started gaining momentum and recorded an increase of 1 percent to settle at 12.9 percent which is a massive increase in the financial sector.

Conclusion

In conclusion, it should be mentioned that the financial and European economic crises of the years 2008 – 2012 had made a great impact on the global economy and influenced economic development of each country of the world. In particular, it have had a negative impact on the Australian banking sector.

This is evidenced in the financial statement of the National Australian Bank. The recent events dictate particular actions that governments should take to restore the economies of their states. Thus, It is now important for government to come up with good control mechanisms to help mitigate more impact of these crises on these banks.

References

Dick, KN 2009, : Analysis and policy implications. Web.

National Australian Bank 2008, Full year financial results. Web.

National Australian Bank 2009, Full year financial results. Web.

National Australian Bank 2007, Full year financial report. Web.

National Australian Bank 2010, Full year financial result. Web.

National Australian Bank 2006, Full year financial result. Web.

National Australian Bank, 2011, Third quarter trading results. Web.

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IvyPanda. (2020, January 2). The Financial and European Economic Crisis 2008 – 2012. Retrieved from https://ivypanda.com/essays/global-financial-crisis-5/

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IvyPanda. "The Financial and European Economic Crisis 2008 – 2012." January 2, 2020. https://ivypanda.com/essays/global-financial-crisis-5/.

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IvyPanda. 2020. "The Financial and European Economic Crisis 2008 – 2012." January 2, 2020. https://ivypanda.com/essays/global-financial-crisis-5/.

References

IvyPanda. (2020) 'The Financial and European Economic Crisis 2008 – 2012'. 2 January.

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