The financial crisis which has engulfed the world in recent times, sometimes referred to as the Credit Crunch or the Global Financial Crisis, is generally considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. The financial meltdown resulted in the collapse of super Financial institutions with power status, the bailout of mega-banks by the central governments, and plummeting stock markets around the world. However, in 2011, the world may be witnessing something which may be equally big, or maybe even bigger. The WWII economic crisis and conditions are still extremely fragile. Probably turning short-term debt into long-term loans was the biggest trigger for this economic recession in 2011. Many experts may call us to be somewhat more pessimistic in our outlook than is required, but here are some reasons to believe so.
The economy in US is in shackles to say the least. The infrastructure and housing sector is yet to recover and high levels of unemployment are haunting the super-power. The US is drowning in negative equity and job-less homes. Tax cut opted for by the US government may be a short term evasive measure, medium and long term fiscal reforms may be necessary to pull US economy through this period. The recession in 2008-2009 is still making its presence felt in US, by depleting the reserves of the economic super-power. The tremble caused by BNP Paribas and Lehman Brothers is yet to subside full. Recently, US have been downgraded from its rating by Standard and Poor. The economists are suggesting long term reforms in banking, such as raising capital ratios and switching from wholesale to retail funding, while filling in short-term gaps in capital. However, the banking industry would be subjected to a slow recovery in this track.
Japan has lost its AAA rating long back. The growth prospects for the once economic super-power are pretty poor. Currently Japan’s national debt actually in excess of 200% of its GDP but its bond yields remain extremely low, since the growth prospects are not looking bright. As an effect of this, Japanese production has declined by over 15% in recent times. There is a need for huge amounts of Foreign Direct Investments to stimulate the growth of the Japanese economy.
The major debt that Greece is facing and the crisis could not be cured by the massive Eurozone and IMF bailout. The current bailout support could expire by 2013, and there has been no major economic or financial restructuring within Greece. While the Government of Greece is presently sold out to the Deutschland, this is even a bigger cause of concern because now the government will not even be able to print bills to increase inflation to depreciate its own assets. With the huge debt on Greece, the rest of EURO-Nations are equally strapped in the rear to come out with policy changes that may liberate them from the dire straits.
Europe in general is under severe economic stress. Without a major restructuring of debt, progress seems almost impossible. Debt burdens may continue to spiral upwards, and in several EURO using nations a debt write-down is very likely. German, French, and British banks hold most of the national debts, and a shiver there may trigger a collapse of the balance which apparently is resting on a spindle.
With the advanced economies under such severe stress, emerging economies, may be slightly insulated from major impacts, which can cause a huge eruption of their regular life. Worldbank posits that the financial stress for the emergent and developing economies may be over. However, since the developments in these economies are heavily dependent on the FDI from the economic super-powers, the development is likely to hit stagnation. Is this an indication that the next financial tremble will arise from the developing economies? Are we really waiting for another bubble to burst?
About the Author: This has been prepared by Kevin Maddox, who is an alumnus of an Ivy League B-School from United States. He is a lecturer in management in a Premium Business School and is also a consultant for multiple fortune 500 organizations.