Financial crisis
The term financial crisis is applied broadly to a variety of situations in which some
financial institutions or assets suddenly lose a large part of their value. In the 19th and
early 20th centuries, many financial crises were associated with banking panics, and many
recessions coincided with these panics. Other situations that are often called financial
crises include stock market crashes and the bursting of other financial bubbles, currency
crises, and sovereign defaults.[1][2] Financial crises directly result in a loss of paper wealth;
they do not directly result in changes in the real economy unless a recession or depression
follows.
Types of Financial Crisis
Banking crisis
When a bank suffers a sudden rush of withdrawals by depositors, this is called a
bank run. Since banks lend out most of the cash they receive in deposits (see fractional-
reserve banking), it is difficult for them to quickly pay back all deposits if these are
suddenly demanded, so a run may leave the bank in bankruptcy, causing many depositors
to lose their savings unless they are covered by deposit insurance. A situation in which
bank runs are widespread is called a systemic banking crisis or just a banking panic. A
situation without widespread bank runs, but in which banks are reluctant to lend, because
they worry that they have insufficient funds available, is often called a credit crunch. In this
way, the banks become an accelerator of a financial crisis. [3]
Speculative bubbles and crashes
Economists say that a financial asset (stock, for example) exhibits a bubble when its
price exceeds the present value of the future income (such as interest or dividends) that
would be received by owning it to maturity.[4] If most market participants buy the asset
primarily in hopes of selling it later at a higher price, instead of buying it for the income it
will generate, this could be evidence that a bubble is present. If there is a bubble, there is
also a risk of a crash in asset prices: market participants will go on buying only as long as
they expect others to buy, and when many decide to sell the price will fall. However, it is
difficult to tell in practice whether an asset's price actually equals its fundamental value, so
it is hard to detect bubbles reliably. Some economists insist that bubbles never or almost
never occur.[5]
International financial crises
When a country that maintains a fixed exchange rate is suddenly forced to devalue
its currency because of a speculative attack, this is called a currency crisis or balance of
payments crisis. When a country fails to pay back its sovereign debt, this is called a
sovereign default. While devaluation and default could both be voluntary decisions of the
government, they are often perceived to be the involuntary results of a change in investor
sentiment that leads to a sudden stop in capital inflows or a sudden increase in capital
flight.
Us Financial Crisis
The collapse of the housing bubble, which peaked in the U.S. in 2006, caused the
values of securities tied to real estate pricing to plummet thereafter, damaging financial
institutions globally.[7] Questions regarding bank solvency, declines in credit availability,
and damaged investor confidence had an impact on global stock markets, where securities
suffered large losses during late 2008 and early 2009. Economies worldwide slowed during
this period as credit tightened and international trade declined. [8] Critics argued that credit
rating agencies and investors failed to accurately price the risk involved with mortgage-
related financial products, and that governments did not adjust their regulatory practices
to address 21st century financial markets. [9] Governments and central banks responded
with unprecedented fiscal stimulus, monetary policy expansion, and institutional bailouts.
Greece Crisis
Greece has a capitalist economy with the public sector accounting for about 40% of
GDP and with per capita GDP about two-thirds that of the leading euro-zone economies.
Tourism provides 15% of GDP. Immigrants make up nearly one-fifth of the work force,
mainly in agricultural and unskilled jobs. Greece is a major beneficiary of EU aid, equal to
about 3.3% of annual GDP. The Greek economy grew by nearly 4.0% per year between
2003 and 2007, due partly to infrastructural spending related to the 2004 Athens Olympic
Games, and in part to an increased availability of credit, which has sustained record levels
of consumer spending. But growth dropped to 2% in 2008. The economy went into
recession in 2009 and contracted by 2%, as a result of the world financial crisis, tightening
credit conditions, and Athens' failure to address a growing budget deficit, which was
triggered by falling state revenues, and increased government expenditures.
Debt Crisis of Greece:
`Greece has themselves – and all Euro wielding countries in a predicament.
Continuous borrowing has placed them in a position where they cannot pay any loans back,
and the other Euro countries are not willing to give them loans to bail them out.
Some senior German policy makers went as far as to say that emergency bailouts should
bring harsh penalties to EU aid recipients such as Greece. However, such plans have been
described as unacceptable infringements on the sovereignty of eurozone member states
and are opposed by key EU nations such as France.
There has also been criticism against speculators manipulating markets: Angela
Merkel stated that "institutions bailed out with public funds are exploiting the budget crisis
in Greece and elsewhere".
On 23 April 2010, the Greek government requested that the EU/IMF bailout package
(made of relatively high-interest loans) be activated. The IMF has said it was "prepared to
move expeditiously on this request". The size of the bailout is expected to be €45 billion
($61 billion) and it is expected to take three weeks to negotiate, with a payout within
weeks of €8.5 billion of Greek bonds becoming due for repayment. On 27 April 2010, the
Greek debt rating was decreased to BB+ (a 'junk' status) by Standard & Poor's amidst fears
of default by the Greek government. The Greek government was offering borrowers 15.3%
on two-year government bonds. Standard & Poor's estimates that in the event of default
investors would lose 30–50% of their money. Stock markets worldwide and the Euro
currency declined in response to this announcement.
On May 1, a series of austerity measures was proposed. The proposal helped
persuade Germany, the last remaining holdout, to sign on to a 110 billion euro bail-out
package for Greece. On May 5, a national strike was held in opposition to the planned
spending cuts and tax increases. Protest on that date was widespread and turned violent in
Athens, killing three people.
Sovereign debt crisis:
Recent crisis in Greece is the new addition to the long list of casualties of the global
financial and economic crisis that started in 2007. It has called into question financial
institutions as diverse as the public accounting system to the common currency policy of
the Euro zone.
In October 2009, the newly-elected government of Greece revealed that the
country’s budget deficit was far higher than previously thought: more than 12% as
opposed to less than 3%, as required for membership in the EU. Ever since, the deficit has
been revised upwards and currently hovers around 13.6%. In addition, the sovereign debt
of Greece is nearly 400 billion dollars, close to 120% of its GDP and it runs a current
account deficit of nearly 14% in the Euro zone. These data together strongly imply that
Greece has invested more than it saved (i.e., private and public sector savings taken
together), supporting this extra investment by borrowing from the rest of the world. In
short, Greece appears to have lived beyond its means.
International finance has responded to this situation by downgrading its outlook of
the public finances of Greece. The Credit Default Swap (CDS) spread on Greece government
bonds (which gives the financial markets’ perception of the possibility of default on its debt
by the Greek government) has sharply increased in the recent past as the rating of these
bonds was continuously degraded by agencies. In the past fortnight, the bonds were
relegated by a rating agency to the status of “junk” bonds. In less than six month, the
interest payable on these bonds has climbed from less than 4% to more than 15%. Greece
certainly cannot afford to borrow at such prohibitive rates. Being a Euro zone country
Greece doesn’t have the choice of treating its internal and external crisis separately: Greece
can’t print currency for deficit financing at home and devalue its currency to attempt to
regain export competitiveness. In these conditions, its only choice appears to be to appeal
for a bail-out from the EU and/or IMF.
Greek Government Funding Crisis:
Causes
The Greek economy was one of the fastest growing in the eurozone during
the 2000s. From 2000 to 2007 it grew at an annual rate of 4.2% as foreign capital flooded
the country. A strong economy and falling bond yields allowed the government of Greece to
run large structural deficits. Since the introduction of the Euro, debt to GDP has remained
above 100%. The global financial crisis that began in 2008 had a particularly large effect on
Greece. Two of the country's largest industries are tourism and shipping, and both were
badly affected by the downturn with revenues falling 15% in 2009.
To keep within the monetary union guidelines, the government of Greece has been
found to have consistently misreported the country's official economic statistics. In the
beginning of 2010, it was discovered that since 2001 Greece had paid Goldman Sachs and
other banks hundreds of millions of dollars in fees for arranging transactions that will hide
the actual level of borrowing. The purpose of these deals made by several subsequent
Greek governments was to enable them to spend beyond their means, while hiding the
actual deficit from the EU overseers.
May In 2009 the government of George Papandreou revised its deficit from 5% to
12.7%. In 2010, the Greek government deficit was estimated to be 13.6% which is one of
the highest in the world relative to GDP. Greek government debt was estimated at €216
billion in January 2010. Accumulated government debt is forecast, accor ng to some di
estimates, to hit 120% of GDP this year. The Greek government bond market is reliant on
foreign investors, with some estimates suggesting that up to 70%[citation needed] of Greek
government bonds are held externally. Estimated tax evasion costs the Greek government
over $20 billion per year. Despite the crisis, Greek government bond auctions have all been
over-subscribed in 2010 (as of 26 January). According to the Financial Times on January
25, 2010 "Investors placed about €20bn ($28bn, £17bn) in orders for the five-year, fixed-
rate bond, four times more than the (Greek) government had reckoned on." In March, again
according to the Financial Times, "Athens sold €5bn (£4.5bn) in 10-year bonds and
received orders for three times that amount.
Downgrading of debt
On 27 April 2010, the Greek debt rating was decreased to 'junk' status by Standard
& Poor's amidst fears of default by the Greek government. Yields on Greek government
two-year bonds rose to 15.3% following the downgrading. Some analysts question Greece's
ability to refinance its debt. Standard & Poor's estimates that in the event of default
investors would lose 30–50% of their money.[26] Stock markets worldwide declined in
response to this announcement.
Solutions
On May 2, a loan agreement was reached between Greece, the other eurozone countries,
and the International Monetary Fund. The deal consists of an immediate 45 billion euros in
low interest loans to be provided this year, with more funds available later. A total of 100
billion euros has been agreed. The government of Greece agreed to impose a fourth and
final round of austerity measures. These include:
Public Sector limit introduced of 1000 Euros to bi-annual bonus, abolished entirely
for those earning over 3,000 Euros a month.
Cuts of 8% on public sector allowances and 3% pay cut for DEKO (public sector
utilities) pay cheques.
Freeze on increases in public sector wages for three years.
Limit of 800 Euros to 13th and 14th month pension installment. Abolished for those
pensioners receiving over 2,500 Euros a month.
Return of special tax (LAFKA) on high pensions.
Changes planned to the laws governing lay-offs and overtime pay.
Extraordinary taxes on company profits.
Increases in VAT to 23%, 11% and 5.5%.
10% rise in taxes on alcohol, cigarettes, and fuels.
10% increase in luxury taxes.
Equalization of men's and women's pension age limits.
General pension age does not change but a mechanism is introduced to scale them
to life expectations changes.
Creation of a financial stability fund.
Other Solutions:
Control the Speculators activities.
Greece must cut on public expenditure to pay debts
Greece has to reduce import and increase imports to maintain the balance.
Sharply reduce the wages and salaries
Reduce the other benefits such as pension, social security, and increase taxes like
VAT.
Pakistan Crisis:
Water crisis
The partition of the South Asian Subcontinent on 14 August 1947 into the
dominions of India and Pakistan gave birth to a host of problems, including that of
the sharing of waters of the mighty Indus River System. The issue was of concern to
Pakistan because the head works of the rivers that irrigated Pakistan’s Punjab
province mostly went to the Indian side.
On 30 December 1947, Pakistan and India concluded a ‘Standstill Agreement’ for a
three-month period under which Pakistan continued to receive water supply from
the head works of Madhopur on River Ravi and Ferozepur on River Sutlej, the two
tributaries of River Indus.
As the interim arrangement ended on 31 March 1948, the next day the Government
of Indian Punjab stopped the supply of water to Pakistan from the Madhopur
headwork, affecting, according to one estimate, 5.5% of Pakistan’s irrigated area.
Pakistan raised the issue at the Inter-Dominion Conference held on 3-4 May 1948.
India dismissed Pakistan’s claim over water, from the head works on its side as a
matter of right but agreed to release water as a provisional arrangement. It was thus
abundantly clear that slowly and gradually the quantity of water would be reduced.
In 1951, David Lilienthal, who had formerly served as Chairman of the Tennessee
Valley Authority and as Chairman of the US Atomic Energy Commission, undertook a
research tour of Pakistan and India for writing a series of articles.
In one of his articles, he opined that it would be very beneficial for the region if the
two countries cooperated to jointly develop and operate the Indus Basin river
system. He further suggested that the World Bank might play its role in bringing
India and Pakistan to agree on some plan to develop the Indus river system for
mutual benefit.
President of the World Bank, Eugene Black, picked up the idea and offered his good
offices to resolve the issue of water sharing between India and Pakistan. The two
neighbors welcomed the initiative and after tough bargaining during the protracted
negotiations that spread, over nine years arrived at the contours of the agreement.
Broad parameters thus settled the work of drafting began. Finally, in September
1960, President of Pakistan Field Marshall Mohammad Ayub Khan and Prime
Minister of India Jawaharlal Nehru signed the Indus Water Treaty in Karachi.
Under the Indus Water Treaty:
1. Pakistan surrendered three eastern rivers, Ravi, Sutlej and Beas to India with
some minor rights to Pakistan.
2. Largely three western rivers namely Indus, Jhelum and Chenab remained with
Pakistan.
3. India was allowed to use water from the western rivers for irrigation of 642,000
acres of land that were already being irrigated from these rivers along with an
entitlement to further irrigate 701,000 acres for crops.
4. India was also given specified entitlement for ‘other’ storages, including, power
and flood storages i.e., storages for non-consumptive purposes.
5. Pakistan was to meet the requirements of its eastern river canals from the
western rivers by constructing replacement works.
6. Both parties are bound to, regularly exchange flow-data of rivers, canals and
streams.
7. A permanent Indus Water Commission, with one Commissioner from each side,
was to be set up to resolve issues.
8. The procedures were set out for settlement of ‘questions’ ‘differences’ and
‘disputes’ bilaterally and through neutral experts and International Court of
Arbitration as the case might be.
Energy Crisis
The severe energy crisis that Pakistan is facing today has had enormous negative
impact on its economic development and political stability. The long power outages
across the country has made it an issue of extreme volatility causing suffering in the
daily life of Pakistani and putting Pakistan’s economic future in serious jeopardy .
Pakistan’s energy requirements are increasing in geometrical ratio, and not only
economic growth but political stability is directly linked with the availability of
adequate energy resources. Pakistan initiated discussions with Iran in 1985 for
construction of a natural gas pipeline linking Karachi with the South Pars natural gas
field. The agreement called “peace pipeline” was signed by the president of Iran and
Pakistan in Turkey on June 4, 2009, after considerable delay and lengthy negotiations,
on price formula, security guarantee and transit royalties.
The pipeline would run about 1,115 km in Iran, 705 km in Pakistan and 850 km in
India, had it joined IPI. Total investment is estimated at $7.04 billion and may take 4-5
years for completion.
The US has continued its opposition to the proposed pipeline and urged India and
Pakistan to abandon the project and instead explore alternative sources, such as coal,
wind or solar energy. Samuel Bodman, Energy Secretary under Bush administration
conveyed US concerns: “If IPI is allowed to be formed in our judgment, this will
contribute to the development of nuclear weapons by Iran. We need to stop this”. The
US has periodically conveyed its concerns at the highest level. This policy remains
constant and now even more strident in the context of Iran nuclear standoff with US.
