This decade was one of the most comprehensive decades in teaching us a lot of lessons regarding the failures in Financial Accounting, side effects of Globalization and the wrongly designed policies for the Financial Growth.
The first failure was the happening in the world’s largest economy United States termed as “Subprime Crisis” due to Housing Assets Bubble (2008) and then the subsequent or eventual “Euro Debt Crisis” (2010) both of which are interrelated in some or the other way which questions the Financial Stability of Global Business Cycle.
The trigger to the Euro Crisis was the default on the Debt by Greece which represents only 2.5% of the euro zone economy and has HDI of above 0.9. Later on there were growing concerns for Portugal, Italy and Spain also in short PIGS Economy.
The Greek Economy, mainly dependent on shipping and tourism Industries was hit very hardly during the recession in the world. The skyrocketing Fiscal Deficit (13.6 per) due to very high borrowing could no more be compensated from the revenues generated by the key sectors.
There was a possibility that Greece would have been forced to default on its debt. It could not devalue a portion of its obligations by the means of introducing inflation. This would have effectively removed Greece from the Euro Zone, as it would no longer have collateral with the European Central Bank.
The Greek debt rating kept decreasing to the 'junk' status which questioned Greece's ability to refinance its debt. This was also a set back to Investor’s confidence in the Eurozone Nations.
Hence a bailout package was agreed upon between Greece, the other Eurozone countries, and the International Monetary Fund in lieu of strict austerity measures.
Greece opted for those measures which would amount to a total of €30 billion (i.e. 12.5% of 2009 Greek GDP) and consist of 5% of GDP tightening in 2010.
This Debt Crisis hovered over a lot of other European Nations and as the World’s Economy is interconnected (thanks to Globalization), it’s after impacts were felt across the Globe. The Financing needed for the Eurozone in 2010 come to a total of €1.6 trillion, while the US is expected to issue US$1.7 trillion more Treasury securities.
Few of the shortcomings
Greece bribed paid Goldman Sachs and other banks hundreds of millions of dollars in fees for arranging false. The purpose was hiding the actual deficit from the EU overseers.
The International credit rating agencies – Moody's, S&P and Fitch – have also played a central and controversial role and have been accused of giving overly generous ratings due to conflicts of interest which did not deter the Foreign Investors to oversubscribe the Bonds Offers.
EU emergency measures
European Financial Stability Facility (EFSF) has been created aimed to preserve the financial stability in Europe
It’s a special purpose vehicle (SPV) that will sell bonds and use the money it raises to make loans up to a maximum of € 440 billion to Eurozone nations in need which will be backed by guarantees of the European Commission.
A single authority responsible for tax policy oversight and government spending coordination called the European Treasury was also planned to be rolled out.
Corrective measures
In any country there are three policies- Monetary, Fiscal and Foreign Exchange Policy which should work in tandem with each other.
Regarding the Monetary Policy, the orthodox fundamentals of Banking Sector in Europe need a strong revision in this dynamic and risk taking world. The stricter monetary policy should be kept in the picture as they keep the check on the money flowing in the country that may also indirectly also reduce the trade to GDP ratio; which in turn prevent the cascading impact of recession.
While giving the loans proper collateral should be kept aside inspite of the borrower’s good credit history. Some Base Rate as in India should be fixed up while giving the loans.
There should be more transparency in case of Banking Operations and fudging of accounts should not be tolerated at any cost. A very heavy penalty such as snatching of Banking License should be imposed on the defaulting Banks. A cap should be made on the number of refinancing a particular loan can have, as they make the system more opaque.
Regarding the Fiscal Policy, Austerity Measures should be very well incorporated in the Fiscal Policy of European Nations. No doubt Fiscal Consolidation hampers the growth of the Nation but for the debt to GDP Ratio of more than 100 percent it should be made mandatory. The Eurozone requires a common fiscal policy rather than controls on portfolio investment.
Regarding the Foreign Exchange Policy, the cross border capital flows should be regulated in the Euro Area as they are responsible for the Asset Bubbles and current account imbalances which increase the level of default on Debt.
Innovative IT Solutions such as Anti Money Laundry Solutions, Risk Management Solutions should be necessarily implemented in the Banks.
Some more tax concessions should be given to the IT Companies so that they invest more money in Research and Development activities and come up with new solutions regarding the Assets Bubble formations and Capital Accounts Imbalances etc. These solutions would help the Banks to take the corrective actions very well in advance and hence avert any recession in the economy of the Nation.
More powerful agencies need to be fostered which can take some proactive steps to formulate policies which can check the countries Fiscal and Exim Policies and also its debt to GDP ratio. The rules for the same need to be defined keeping in mind various parameters such as Trade Deficit, GDP (Nominal and PPP), Geni coefficient, HDI etc in this order only.
So, in short if we take some appropriate proactive steps and keep monitoring our Financial Systems, various crises can just be made history very easily.
The first failure was the happening in the world’s largest economy United States termed as “Subprime Crisis” due to Housing Assets Bubble (2008) and then the subsequent or eventual “Euro Debt Crisis” (2010) both of which are interrelated in some or the other way which questions the Financial Stability of Global Business Cycle.
The trigger to the Euro Crisis was the default on the Debt by Greece which represents only 2.5% of the euro zone economy and has HDI of above 0.9. Later on there were growing concerns for Portugal, Italy and Spain also in short PIGS Economy.
The Greek Economy, mainly dependent on shipping and tourism Industries was hit very hardly during the recession in the world. The skyrocketing Fiscal Deficit (13.6 per) due to very high borrowing could no more be compensated from the revenues generated by the key sectors.
There was a possibility that Greece would have been forced to default on its debt. It could not devalue a portion of its obligations by the means of introducing inflation. This would have effectively removed Greece from the Euro Zone, as it would no longer have collateral with the European Central Bank.
The Greek debt rating kept decreasing to the 'junk' status which questioned Greece's ability to refinance its debt. This was also a set back to Investor’s confidence in the Eurozone Nations.
Hence a bailout package was agreed upon between Greece, the other Eurozone countries, and the International Monetary Fund in lieu of strict austerity measures.
Greece opted for those measures which would amount to a total of €30 billion (i.e. 12.5% of 2009 Greek GDP) and consist of 5% of GDP tightening in 2010.
This Debt Crisis hovered over a lot of other European Nations and as the World’s Economy is interconnected (thanks to Globalization), it’s after impacts were felt across the Globe. The Financing needed for the Eurozone in 2010 come to a total of €1.6 trillion, while the US is expected to issue US$1.7 trillion more Treasury securities.
Few of the shortcomings
Greece bribed paid Goldman Sachs and other banks hundreds of millions of dollars in fees for arranging false. The purpose was hiding the actual deficit from the EU overseers.
The International credit rating agencies – Moody's, S&P and Fitch – have also played a central and controversial role and have been accused of giving overly generous ratings due to conflicts of interest which did not deter the Foreign Investors to oversubscribe the Bonds Offers.
EU emergency measures
European Financial Stability Facility (EFSF) has been created aimed to preserve the financial stability in Europe
It’s a special purpose vehicle (SPV) that will sell bonds and use the money it raises to make loans up to a maximum of € 440 billion to Eurozone nations in need which will be backed by guarantees of the European Commission.
A single authority responsible for tax policy oversight and government spending coordination called the European Treasury was also planned to be rolled out.
Corrective measures
In any country there are three policies- Monetary, Fiscal and Foreign Exchange Policy which should work in tandem with each other.
Regarding the Monetary Policy, the orthodox fundamentals of Banking Sector in Europe need a strong revision in this dynamic and risk taking world. The stricter monetary policy should be kept in the picture as they keep the check on the money flowing in the country that may also indirectly also reduce the trade to GDP ratio; which in turn prevent the cascading impact of recession.
While giving the loans proper collateral should be kept aside inspite of the borrower’s good credit history. Some Base Rate as in India should be fixed up while giving the loans.
There should be more transparency in case of Banking Operations and fudging of accounts should not be tolerated at any cost. A very heavy penalty such as snatching of Banking License should be imposed on the defaulting Banks. A cap should be made on the number of refinancing a particular loan can have, as they make the system more opaque.
Regarding the Fiscal Policy, Austerity Measures should be very well incorporated in the Fiscal Policy of European Nations. No doubt Fiscal Consolidation hampers the growth of the Nation but for the debt to GDP Ratio of more than 100 percent it should be made mandatory. The Eurozone requires a common fiscal policy rather than controls on portfolio investment.
Regarding the Foreign Exchange Policy, the cross border capital flows should be regulated in the Euro Area as they are responsible for the Asset Bubbles and current account imbalances which increase the level of default on Debt.
Innovative IT Solutions such as Anti Money Laundry Solutions, Risk Management Solutions should be necessarily implemented in the Banks.
Some more tax concessions should be given to the IT Companies so that they invest more money in Research and Development activities and come up with new solutions regarding the Assets Bubble formations and Capital Accounts Imbalances etc. These solutions would help the Banks to take the corrective actions very well in advance and hence avert any recession in the economy of the Nation.
More powerful agencies need to be fostered which can take some proactive steps to formulate policies which can check the countries Fiscal and Exim Policies and also its debt to GDP ratio. The rules for the same need to be defined keeping in mind various parameters such as Trade Deficit, GDP (Nominal and PPP), Geni coefficient, HDI etc in this order only.
So, in short if we take some appropriate proactive steps and keep monitoring our Financial Systems, various crises can just be made history very easily.
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