Remarks on the Economic Crisis Affecting the European States at the End of 2011

By Ionescu, Eduard | Economics, Management and Financial Markets, December 2012 | Go to article overview

Remarks on the Economic Crisis Affecting the European States at the End of 2011


Ionescu, Eduard, Economics, Management and Financial Markets


ABSTRACT. The international financial and macro-economic frame of the current economic crisis is subjected to certain tensions yet remains relatively robust, even if there is a visible deceleration of economic growth in certain countries, the correlation between the price of actives due to the adjustment of the perception of risk is materialized, and the characteristics of the financial markets are significantly changed.

JEL Classification: G01, F40

Keywords: financial markets, recession, crisis, world economics, economic deficit

THE INTERNATIONAL CONTEXT OF THE CURRENT CRISIS

The United States and the rest of the world have fallen prey to the deepest and longest recession in post-World War history. There, have been successful investors, public servants, economic analysts who have tried to make previsions on the trend of this crisis, at the end of 2007 or the beginning of 2008, when the credit collapse was already amply described in the press and the governments tried to adopt extraordinary measures for dampening the effects.

At that point, these economists did not understand what was going on and neither did they have any idea of the global effects of the phenomenon. The raising of interest rates in the United States from 2003 to 2006 has created more and more difficulties for some debtors to honor their debt to the banks. These problems have been felt most acutely on the American high risk mortgage guaranteed deed markets. The investors could no longer identify and reasonably evaluate the risks of their investments due to the low transparency of the innovative financial instruments markets. The level of the risk per ensemble was reevaluated and the liquidity deteriorated due to the negative perceptions of risk, which have extended over other categories of financial instruments. The modification of the characteristics of international financial systems beginning with the second half of 2007 was not a surprise, numerous supranational institutions (IMF, BIS, BCE) pointing towards the fact that the risk is under-evaluated and that an inverse evolution is more and more likely.

The main identified causes which lay at the base of the problems within the financial systems of developed countries were:

* the development of financial innovations undergone without an adequate understanding of risks taken and without the implementation of adequate methods of risk management;

* the significant excess of liquidities in the context of low interest rates which promoted the taking of high risks in order to obtain higher productivity;

* the transparency of the placing in innovative products as well as the respective degree of implementation were insufficient.

The central banks reacted promptly through the immediate measures which comprised the urgent supply of liquidity, the use of new financial facilities over the ones offered through the current monetary policy operations and, in some situations, the reduction (aggressive within the FED) of monetary policy rates.

The world economy slowed its growth rate, in the context of the extensions of the effects of the financial crisis and the transformation of the latter into an economic crisis.

On the backdrop of the decreasing consumer trust, the lowering of housing prices and stocks values but also due to restrictions regarding the conditions for crediting at the world level, the global economic conditions have rapidly deteriorated starting with the middle of September. Due to the financial crisis, on the real activity a diminishing effect on world trade has been observed.

Regarding international financial markets, dominated by people who invest other people's money, often in a context in which a destructive behavior gives birth to great fortunes, the evolution of these is marred by volatility and pronounced decrease of stock price.

Referring to the prices of raw materials (exclusively energy resources), these have been very volatile, registering a significant rise, determined by the prices of agricultural products and followed by a sharp decrease, on the background of the reduction of the prices of energy resources and the prices of the non-energy wares have risen. …

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