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Abstract

The objective of this paper is to evaluate the recent financial crisis impact on financial institutions in countries that are still developing. This study is crucial in contributing to investor’s knowledge and practitioners in the market to be conscious on risks accompanying investments in countries that are still developing. The global financial crisis resulted from the credit crisis in the US. This led to destabilization of financial markets of countries that are already developed, leading to the downfall of names that are prominent in the business of banking. The primary igniter of this financial crisis was partly contributed to the banks and other financial institutions in the USA.

This is due to the extensive duration of inapt lending. Another reason that led to this crisis basing on the latest finding is that the effect of global financial crisis was made worse by the rising cost of global energy causing a push up in inflation. The countries that are still developing have had to face strong rises in prices. To facilitate the analysis on financial crisis, various publications are going to be considered. This paper is going to deliberate itself on the findings that were carried out by Eichengreen which supported the idea that all the banks in countries that are still developing are going to have their credit lines from foreign countries reduced or totally stopped. This is going to ensure that the economies received by these countries are going to dry up. In accordance with recommendations, findings can be developed in a manner that the role of sharing the loss and developing counties policies in relation to the crisis and stabilization management, for instance, will ensure good governance and the rule of law. The government should use mechanisms to recapitalize banks, giving liquidity to banks, and giving guarantee on bank liabilities by funding the markets. They are also responsible for supporting asset markets that are troubled.

Asset inflation prices should be established under the authorities of monetary policy control by the government. The responses to crisis that cuts across the globe should be inclusive, methodical, decisive and organized. Because problems that are global, they need global solutions that are multilateral. If the crisis persists for long periods, the local and the state governments may start to limit their operations on financial arrangements.

Introduction

In the 20th century, the world experienced two financial crises. The first was witnessed in 1929-30. This affected the developed nations – America and Europe. The second crisis took place in 1997 and lasted for 2 years until 1999. This was also felt through the Asia-Pacific economies (Madura 34).

The recent crisis on finance has called the world to concentrate on the crisis in the past months. It was observed with anxiety, as different as it felt outwards from the areas that were initially affected. Alan Greenspan named as “once in a century credit tsunami”, which originated from the collapse of housing investment in the US. The debate from the disasters came before it was observed that disaster came after disaster.  The instability moved from one sector to another sector.  This started from banking, moving into the housing sector and other markets on finance, and finally, into all parts of the real economy. The financial crisis that has taken place cut across the private and public boundary. This has affected the private firms and statements of finance and compelled the new demands that are heavy on the finance sector of the public. The financial crisis has extended beyond the borders of the developed world. At the moment, there is enough evidence to believe that the crisis will extend to other countries that are still developing. This affected the economic progress in recent years.

According to recent findings, anxieties have complemented the global financial crisis. This commenced from the disaster on the US subprime mortgage with the aid of essential country governments which came up with measures, for instance, liquidity provision and packages on bailout for banks that were distressed. Fear comes when a firm grips markets using finance, this turns to abating. The stock markets are unstable, whereas the indicators that measures the risk on investors are recording all time Highs.

This paper is going to concentrate more on the world that is still developing. It is worth noting that focus of most of the policymakers is on how affected governments are going to respond to the crisis. However, the focus should also include countries that are still developing as they confront the instability surge. A greater percentage of the world‘s population live under the abject poverty, and all emanate from the developing world; this is basing on their survival margin, any crisis on economy posses ruthless consequences on human in countries that are still developing. This, therefore, points to reasons that are altruistic in relation to the countries that are still developing in the crisis. There are also strong reasons to believe on the self-interest. It may be argued that demand from booms that are led by investment in countries that are developing put a lot of effort to move the sporadic expansion of the global economy, and preventing depression and deflation could rely on maintaining the growth.

This study is going to discuss on the global growth dynamics between 2002 and 2007. This mainly focused on the boom strengthening in the developing and the developed world. It then focuses on how global crisis begun, as a result of bad mortgages in the year 2007 and 2008, beginning with the housing crisis in the United States. It then gives a remedy on how governments can respond to this crisis and cushion the developing countries against a rise in prices.

Literature Review

The financial crisis that started in the United States spread to the entire world. At the moment, most of the stock exchange crashed in other countries. This includes Europe and Asia. The cumulative losses of Paris, London and Frankfurt markets summed up to more than $350 billion (Papadopoulous 7). This crisis not only affected the capitalist world alone, but it also affected the socialist countries, such as Russia. In 2008, the stock market of Russia faced the downfall by 50%, and the central bank of Russia had to purchase massive amounts of rubble to prevent any severe fallings against the Euro and US dollar. The crisis was started as a result of the downfall of US subprime mortgage industry. The intensity at which the collapse took place was significant.

In the event of considering the factors as to why the US subprime mortgage crisis turned into crisis on global banking, many of the subprime mortgages actually did not make it on the balance sheets that yielded them. These were also made to look beautiful to foreign banks by investment grading that was high. The failure of subprime borrowers to repay their mortgages actually led to the originating institutions, using their own money to finance foreclosure. This brought the asset back to their balance sheet. This left lots of bank in situations that were unviable financially (Madura 76).

Global Financial Crisis

The reasons that led to the recent crisis are complicated and are connected to the financial markets’ decline in the last 24 months. In the economy of the United States, the industry on banking has been the worse hit as a result of mortgages backed by subprime mortgages that had fallen in value. This was as a result of financial institutions that had bad debts and were reluctant to loan out money. This led to the output of the construction industry facing contractions in lines of credit which contributes up to 15% output of the U.S (Shiller 23).

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