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Causes of Financial Crisis
Ireland developed high growth rates based on rapid expansion of credit and a buildup of personal debt fueled by rising property prices (Ireland's economic crisis: how did it happen and what is being done about it?). This lead to risky bank lending practices. Banks also engaged in short-term borrowing from wholesale money markets causing increased risk appetite. Supervisors and regulators failed to identify and act on the emerging risks. Where construction was a large part of the employment and economy, it caused high unemployment rates and major bank losses in a bubble burst when household income could not afford to pay mortgage debt. Property value decreased making it harder to recover the mortgage value for banks. In turn, it created difficulty for the banks to pay back the short-term borrowing to the wholesale money markets. Where risks were not identified, no plans were put in place for mitigation.
Cyprus' banking system had grown to five times its GDP (Long). Cyprus banks were lending heavily abroad, so in a global financial crisis, banks sustained major losses from bonds and...
In rescue efforts, Cyprus was required to place levies on all bank deposits. When the public presented overwhelming backlash, this caused a confiscation of a share of the depositor's money. This, in turn, caused failure in rescue efforts. This shows how one country's crisis effects other countries in a global financial crisis. Greece's financial crisis lead to Cyprus' financial crisis when Greek bonds devalued and Greek banks began to fail causing Cyprus banks to sustain losses. It also shows inefficiencies in risk management plans. Gaps in risk management plans fail to identify risks and prepare plans to mitigate for emerging risks. This in turn, caused strained in Cyprus' economy with reduced lending.
"Years of unrestrained spending, cheap lending, and failure to implement financial reforms left Greece badly exposed when the global economic downturn struck" (Q&A: Greece's financial crisis explained). Unrestrained spending caused a national debt bigger than the economy as well as debt levels and deficits exceeding the Eurozone limits. Cheap lending…
References
Ireland's economic crisis: how did it happen and what is being done about it? 22 Feb 2012. article retrieved from http://ec.europa.eu/economy/irelands_economic_crisis/index_en.htm. 1 Mar 2014.
Long, Stephen. Explainer: Behind the Cyprus financial crisis. 22 Mar 2013. article retrieved from http://www.ace.net.au/news/2013-03-22/explainer-behind-the-cyprus-financial-crisis/4588736. 1 Mar 2014.
Pettinger, Tejuan. Portugal Economic Crisis. 4 Dec 2012. article retrieved from http://www.economichelp.org/blog/6423/economics/portugal-economic-crisis. Mar 2014.
Q&A: Greece's financial crisis explained. 26 Mar 2010. article retrieved from http:www.cnn.com/2010/Business/02/10/greek.debt.ganda/index.html. 1 Mar 2014.
Many laws have been successful in restricting such practices in order to avoid a similar situation in the future. Today, "when a mortgage borrower wins a rescission case in court, the bank loses the right to foreclose, and has to give up all profits from interest and fees on the loan" (Carter, 2012). However, just a few years after predatory lending caused so much damage, there are already movements
Financial Crisis and Its Implications: Events Occurring Between 2007 and 2009 A Critical Literature Review The Roots of the Crisis Real Estate Valuation Bubble Sub-Prime Mortgages Low Interest Rates Moral Hazard in Regard to Consumer Spending Packaging Real Estate Loans as a Commodity (Derivatives) Market Interrelatedness Future Implications The financial crisis, which seemed to be elevated to its greatest extent world-wide between the years 2007 and 2009, is difficult to unravel. The causes, interlink-ages, and effects are so intertwined that
" (2009) Yam states that over the past year the need existed to involve the government more deeply in the banking industry and especially in the area of deposit guarantees and in the supervision of the risk management of banks. Yam states that it is "…gratifying that so many of the tools that we have been able to rely on, including the apparatus and contingency arrangements for ensuring liquidity, have
These borrowers had -- knowingly or not -- been gambling on a real estate market they did not understand. Understanding the complexities of the real estate market and fiscal policy is complicated -- those who have grown up without access to the best education and who do not have experienced friends and family to help advise them in this process were the most vulnerable. Squires, Hyra and Renner showed that
Financial crisis that emerged in 2008 came about because of a number of different factors that all contributed something to the problem. Ostensibly, this was a credit crunch. A credit crunch occurs when lender either no longer have money to lend or they are prohibited or unwilling to do so. Mussa (2008) notes a truth that Adam Smith recorded that while money is an essential part of an economy's capital stock,
In other words, there are few controls in place to ensure responsible spending or, in the case of Greece, that the books are not cooked. The implication of this is that Greece makes errors and commits fraud, knowing that the eurozone will be forced to bail them out or risk grave instability. The other nations are then forced to bail Greece out, because they share a common currency and