Foreign Direct Investments and the Economic Crisis in Romania

By Dima, Stela | European Journal of Interdisciplinary Studies, June 2010 | Go to article overview

Foreign Direct Investments and the Economic Crisis in Romania


Dima, Stela, European Journal of Interdisciplinary Studies


1. The Global Economic Crisis - from the Subprime Crisis to the Crisis of Central and Eastern Europe States' Economies

The subprime crisis does not have its origins in the complex financial system of the 21st century, but, in a paradoxical way, it draws its origins from the government ruling of the American president Ronald Reagan and the British Prime Minister Margaret Thatcher. Forasmuch as they counted on the market self-regulatory capacity, the two political leaders have militated for the reduction of the restrictions imposed on the financial market, which led to the uncontrolled explosion of credit. Such an approach represented the basis of the current crisis, as investors and banks undertook huge risks without any constraint.

The main cause that led to the escalation of turbulences was the lack of the banking system's surveillance. According to the opinion of the American investor George Soros, the subprime crisis is "a crisis made by man's hand and due to a wrong belief that gravitates around the idea that the market has the capacity to its correct own excesses by itself'. He also considers that a long period of time will pass till the effects of real-estate market decline will be felt at full intensity [Hegalson, 2008, pg. 97],

It is important to underline that since the market is made of millions of individuals that act inside, it cannot be dominated except by the uncertainty caused by human relations, translated to the existence of the phenomenon of information asymmetry. Thus, market deviations are the result of the interaction between two opposed elements: the wrong perceptions of people and the existent reality. For instance, during the real-estate boom from the United States a reality existed: low interest rates and the possibility to take a loan very easily. On the other hand, there was also the wrong perception of consumers that thought real-estate prices would continue to increase without being affected by the low interest rates [Ammann, 2005],

The deviation of the mortgage market and implicitly of the real-estate market appeared at the moment when the wrong perception of people fueled an explosion that eventually could not be sustained. The belief according to which the market corrects itself is completely wrong, considering the cases of previous crises that have almost destabilized the financial system, and which could not be solved without the dynamic intervention of the authorities, and not by market corrections [Bäcescu, 1999],

In the last years, people on Wall Street proved to be very creative when it comes to ways to convert credit into bonds that could be sold to investors avid for high returns. And the culminant point of these measures was represented by the subprime credits - meaning those financial assets created by "bundling" credits given to people with questionable credit worthiness and that involved a high degree of risk [Bejenaru, 2004],

Now, given the crisis of the American financial system, investors are not willing to undertake any risk, becoming unwilling to pay even for the market price of financial instruments guaranteed by mortgages, and being afraid that debtors might enter the impossibility to reimburse their credits. Such a situation determines banks' reticence to give credits, hardening lending conditions and bringing more and more consumers to a difficult condition.

Banks and brokerage companies have already significantly reduced the accounting assets represented by the financial instruments based on subprime credits, due to the record number of bad debtors. Moreover, there is no sign to show that the decline of the real-estate market is close to its end, a fact that increases more and more the uncertainties regarding the total value of the bad debts. "The only viable solution for solving the crisis of the real-estate market would be the increase in the prices of properties", said Jeffrey Gundlach, the investment director of TCW Group [Nistor, 2008, pg. …

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