Financial Management Topic

Impact of International Financial Crisis on World International Markets

Introduction

Financial markets and credit institutions are fundamental in the modern economy as they coordinate the networks and production circuits by directing capital to where the maximum profit level can be obtained. However, in 2008 the global markets witnessed the worst financial crisis that can only be compared to the days of the Great Depression, which occurred in 1929-1930 (Gokay, 2009; Rose, 2010). A drop in the profits of financial institutions led to a sharp fall in the stock exchange markets (Altvater, 2007; Kim et al., 2009).

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Consequently, there was a spectacular fall in the share prices in most of the world’s major markets, as a number of European and American banks declared massive losses in the 2007 end of year results. Financial crises can occur at national levels but the effect of the same at international levels causes major shifts in the world’s economy. Strategic financial management is cited as an important tool that corporate need in order to predict and overcome similar future scenarios of financial crisis (Scott, 2010).

The purpose of this review is to gather information concerning the impact of international financial crises on the global market. The literatures reviewed will be critically evaluated to determine the causative factors contributing to international financial crises. The role of strategic financial management in corporatism as a way to manage episodes of financial crisis will be analysed. Causes of the global financial crisis Woods (2006) asserts that some economists focus on international factors such as recession in major export markets, contagion, and capital account liberalization as causative factors of financial crisis.

At domestic level, some economists have cited uneven deregulation of the sector of finance (Gamble, 2009), artificially high interest rates, poor fiscal and monetary policy (Burrows & Harris, 2009; Chamon, Manasse, & Prati, 2007), corruption, and capital misallocation as contributors of financial crisis (Engelmann, 2009). The IMF has found itself being criticized on being the push factor to financial crisis because of the pressure that it puts on countries to liberalize their capital accounts.

This is in contrast to IMF’s objectives of giving strict policies to countries that face financial crisis and urging the countries to develop strategies by which they can avoid the situation. Although there is no clear agreement among the economists on how the global financial crises occurred, Dodson and Sipe, (2009) and Kendra, (2009) assert that a major immediate cause is believed to involve the world’s market mortgage-lending that was sub-prime and led to the real estate bubble. A large number of people, who were most considered as bad credit, were offered mortgages by banks (Lapavitsas, 2009).

House prices on the other hand were rising and the prices were anticipated to continue increasing (Archer, 2009). Therefore, it occurred that if people could not keep up with their mortgage payments, then repossession of their houses took place and sold at a tremendous profit. It was paradoxical that the increased lending was the same one that pushed up the house prices higher, and the greater and easier availability of mortgage funding led to the increased demand for housing (Fung, & Forrest, 2002). High housing prices made the owners feel rich and several people reached out to buy houses leading to a consumption boom.

The mortgage lenders would borrow elsewhere in order to lend and this resulted to different kinds of loans which were packaged as financial instruments. The finance market was therefore composed of endless strings of bilateral transactions and this involved incredible financial instruments attached with high risks. Enormous and endless profit seemed to be gained until the periods of bad credit set in. The economic growth slowed in the US and the UK as there was a high number of mortgage holders who could not afford the interest rate, leading to a high number of repossession.

Investors bought the repossessed houses through mortgage-backed securities schemes leading to a sharp decline of the house prices (Sheng & Kirinpanu, 2000). In turn mortgage lenders could not raise enough cash to pay back their loan sources and the chain continued. This led to losses across the world’s financial sector and it was difficult to deal with the problem at hand because the financial instruments were complicated. Furthermore, capital flows became restricted as lenders were afraid to give out credit because of uncertainties of whether they would be repaid.

This became the credit crunch by which there was a sudden reduction of the availability of liquid cash in the financial markets (Kyung-Hwan & Renaud, 2009). All this, not only affected the real estate market and the financial sectors but also led to an important reassessment of asset values in the entire world (Nesadurai, 2000). The credit crunch is a severe drawback to financial institutions as well as the entire economy that governments poured billions of money into private banks in order to revive the culture of borrowing and lending (Coffey, Hrung, Hoai-Luu, &Sarkar, 2009; Okimoto, 2009; Sharma, 2004).

However, nationalizing of banks by the government and the take on their debts has the danger of creating a debt larger than the country’s GDP, a case that occurred with Iceland (Crouch, 2008; Foreign Affairs, 2009; Gokay, 2009). Jessop (2010) draws comparisons of the financial crisis in the world markets from traditional economists’ perspectives-Marx and Engels in the mid-1840 and the present economists’ views. In the traditional modality, frictions that were entailed in the plurality of local markets and states, underdevelopment of finance, and production clumsiness inhibited the expansion of the world market (Lucarelli, 2010).

On the other hand, the achievement of neo-liberalism was for the purpose of reducing these frictions and constraints on the capital accumulation that were deriving from and inefficient financial markets and the national power bodies-the states (McNally, 2009). Impact of the financial crisis The recent financial crisis had a major impact on various firms across the globe (Ruhl, 2010). Various investment banks became bankrupt as potential; clients became hit by a low purchasing power. Several other stock-broking firms witnessed takeovers as mergers and acquisitions were considered the way out of the financial crises.

For some firms, the situation was so severe that a closedown was necessary to prevent further losses (Corwin & Harris, 2001). This financial crisis led to governments of most developed nations like the US and the European community to come up with some dramatic interventions with the aim to curb the situation in the financial markets (Konings, & Panitch, 2008). The collapse of the financial market did not only affect individual national firms but it was a considered as a match to the decline of the overall global economy.

The world witnessed a period of inevitable economic recession marked with financial shock, and sharp economic loss in most markets. Even as firms seek financial management strategies to curb the financial crisis and initiate a recovery process, the IMF still predicted a slow economic growth by developed nations (Gokay, 2009). In fact, the UK’s economy was predicted to shrink at -1. 3 percent in the end of 2008 while that of the US was set to contract by -0. 7 percent by 2009 (World Future Review, 2009).

This therefore indicated that if there was to be any global economic growth, then it would be contributed by emerging economies at an almost 100 percent basis (Gilpin, 2003). The economic performance of emerging economies would be a critical tool that would attain the hope for the global economic revival and growth after the 2010 year (Diao, Li, & Yeldan, 2000; Liao, K. 2001). The emerging world economies predicted for higher growths include the developing Asia and the Middle East (Hiwatari, 2003). On the other hand, the IMF is usually perceived to impose harsh policies on countries that face financial crisis (Kwon, 2004).

For instance, the financial crisis that occurred in the 1990s in East Asia prompted some countries to seek help from the IMF and loans were given but with stricter regulations and comments on financial crisis and how to manage the situation (Woods, 2006). Countries that face financial crisis may be deserted by commercial creditors and therefore the IMF becomes the last resort. However, IMF gives the financial assistance with strings attached and these include formal conditions, influences over the design, implementation, and project/program procurement as well as informal pressures.

This implies that countries facing financial crises and seeking IMF’s assistance to some extent lose their freedom in transacting costs at the world market. Nevertheless, the credit crunch period was a realization time in which many spectators believed that it was time for more and better financial regulations (Desai, 2010; Warby, 2010). Strategies to financial crisis management According to Poon (2003) and WDI (2001) the evolution of the global finance has heightened competition among the major world cities as the cities strive to become the prominent control centres of the world’s financial flows.

Internationalization has been associated with international bonds and shown to account for over 90 percent of the global securities market (Dervis, 2010; Teichman, 2007). The rapid expansion of trans-national corporate activities (Roggoff, 2006), industrial development of the emerging economies, and financial deregulation and the relaxation of capital controls among countries is evidence enough that there are increased financial activities at global level. Some world’s financial and capital cities strengthen hierarchical tendencies as they seek to financial concentration and productivity through differentiation (Olsen, 2009).

At the global scale, this can be observed with London, Tokyo, and New York which tend to dominate the financial hierarchy (Latter, 2001). Top tier cities tend to feature lower share trading value and risks, and market and share concentrations (Kyong, Tae, & Chiho, 2006). Sassen (2001) asserts that global cities are basic agents in financial services production. The services provide trans-national corporations with the necessary capabilities to conduct global operations (Miller & Rosenfeld, 2010). Strategic financial management and crisis management can help reduce the challenges of financial crises periods (Asmussen, 2009).

Deeg and Perez (2000) assert that convergence in national systems of corporate finance and governance can be achieved from the growth of international financial markets and, the lifting of capital controls. Conclusion A financial crisis is a challenging period to the economy of the world as major hit backs affect the financial systems. The impact is felt at individual, local, national and international levels. Problem that result from the world’s markets and affect the financial systems would certainly affect the economy because the latter is driven by finances.

Financial crises period feature periods of low capital flows as financial lenders withhold their services while investors become cautious in buying investment as and this reduces the rate of economic growth. Concerned organizations need to adopt financial management strategies that are realistic, efficient and effective when implemented so as to control major financial crises in the future.

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