What are the common characteristics of the international financial crisis that have occurred since 1990?

The development of the world economy since the 1990s was characterized by the regular economic crises which occurred in different parts of the world, but which affected the global economy at large. In this respect, it is worth mentioning the financial crisis in South-East Asia in 1997-1998, in Argentina and some other Latin American countries in 2002-2003, and, finally, the recent financial crisis which got started in the USA and expanded worldwide to the extent that it became one of the most severe economic crises within the last century. Remarkably, all the financial crises that have occurred since 1990 had a lot of common features and causes. In this respect, it is worth mentioning currency problems, high inflation rate and unemployment, speculations, the US dollar value and international trade as well as international capital lending and borrowing as major causes and factors that determined the development of the financial crises. 

First of all, it should be said that the modern economy is characterized by the rapidly progressing process of globalization that naturally results to the growing economic integration of countries and disappearance of financial barriers between them. As a result, nowadays the situation is very favorable to the investments in the most attracting regions of the world without significant obstacles to the movement of the capital. On the other hand, there appeared a serious problem of the susceptibility of the world economy to the deterioration of the general situation in case of a crisis in a country or a region. In this regard, the financial crises of 1997-1998 in Asia and in 2002-2003 in Argentina are particularly noteworthy.

Basically, the causes of both crises are similar. Speaking about the Asian crisis, it should be said that the crisis was provoked by several causes. Firstly, countries involved into the crisis had private-sector debt problems and poor loan quality. Also, countries faced such problems as  rising external liabilities for borrowing countries, the close alignment between the local currency and the US dollar, weakening economic performance and balance-of-payments difficulties, currency speculation, technological changes in the financial markets, and the lack of confidence in the ability of the local governments to resolve their problems successfully. In such a situation, the local financial markets face not only objective problems, especially those concerning the currency, but also subjective problems such as the disbelief to the local governments. However, the major problem was the rapid downfall of national currencies which caused a profound financial crisis. In such a situation, the local governments really turned to be unable to solve their problems independently and it is mainly due to the assistance of the International Monetary Fund that was forced to initiate a $40 billion program to stabilize the currencies of South Korea, Thailand and Indonesia whose currencies were most affected by the crisis. Gradually, the situation was stabilized.

To a significant extent, similar causes of the crisis were in Argentina in 2002-2003. The major problem proved to be the instability of the national currency since the crisis had actually broken down when the Argentina abandoned the fixed 1 peso – 1 dollar parity and defined the new rate 1.4 peso per 1 dollar. Moreover, the situation deteriorated by the attempt of the government to conduct the pesification of the national economy exchanging dollars at the official rate. Naturally, such actions stimulated the downfall of the national currency. Moreover, Argentina had a considerable international debt, which was not a characteristic of Asian countries but it also had private-sector debt problems, weakening economy performance and unstable political situation.

The crisis was overcome due to the growing export because of the high exchange rate, the high price of soy in the international market, the government encouraged import substitution, developed accessible credit for businesses, staged an aggressive plan for the improvement of tax collection, reduced social welfare and strictly controlled expenditures. The crises in Asia and Argentina revealed the fact that the national economies are often highly dependent on such factors as currency rate, external liabilities, etc. Basically, it is the result of the free flow of capital, in which developed countries, lending capital, win and developing countries, borrowing capital, lose.

At the same time, the financial crises in Asia and Latin American were to a significant extent similar to the recent financial crises, although the latter is more severe than the former. The recent financial crisis has led to a profound economic recession which affected many countries of the world. In such a situation, it is possible to speak about the economic recession on the global scale, while the role of financial crisis in the aggravation of socioeconomic situation in the world can hardly be underestimated. At the same time, the financial crisis did not occur spontaneously. In stark contrast, it was a result of financial speculations which undermined the stability of financial markets of the USA and, later, other countries, including countries of the EU, Japan and other leading countries of the world. In fact, financial speculations did not simply destabilize the situation on financial markets but they inevitably affected the economic development of the world because financial speculations led to unparalleled fluctuation of prices on strategic products, such as oil and affected the national currency rate, including that of the US dollar which could not remain stable in the context of financial speculations. Hence, it is obvious that the multiple causes of the current economic recession and financial crisis are strongly backed up by financial speculations as well as activities of hedge funds which also contribute to the growth of financial speculations and destabilized the situation on financial markets worldwide.
On analyzing the financial crisis and the current economic recession, it is primarily necessary to dwell upon the origin of their origin and development that can help to better understand the essence of current financial problems. First of all, it should be pointed out that the deterioration of the economic situation in the US can and does affect substantially the world economy and global financial markets. The modern economy and financial markets are closely intertwined. The process of globalization stimulates economic development and growth in different parts of the world, while, on the other hand, it makes countries extremely dependable on the situation in foreign markets and vulnerable to economic recession and crisis, such as the one that started in the USA and expanded worldwide.. In such a situation, the current recession of the American economy produces a negative impact on the development of the world economy and global financial markets at large and some countries in particular. Naturally, the US is the country, which is the most affected by the economic recession. This is why it is extremely important to analyze the currents situation in the US economy and find out major causes of the economic recession, its effects and possible perspectives of the further development of the US economy.

In fact, the role of the home mortgage crisis can hardly be underestimated because this crisis practically undermined the stable functioning and development of the US economy. It should be said the decrease of the housing market in the US could be observed since 2005 that naturally could be viewed as a direct indication to the upcoming crisis of the market as well as the deterioration of the economic situation at large, crisis in the financial market of the US and, as a result, the slowdown of the economic growth which outflow into the economic recession that could be observed nowadays in the US. However, it is necessary to underline that specialists (Williams) lay emphasis on the fact that the housing market of the US is not in the freefall. In fact by 2007 and till the present moment the situation in the housing market is relatively stabilized, but the problem is that the current housing market suffers from a substantial fall that has occurred since 2005. At the present moment, the housing market is really in a very difficult position and, what is more important, it does not really demonstrate positive trends to the growth, while it is one of the major priorities of the US economy to revive the housing market and return its financial dynamic, at least, to the past level that existed a couple of years ago. In such a way, the overcoming of the crisis in the housing market can open the way for the activation of the American economy at large, its stabilization and ongoing growth.

In this respect, it should be said that the mortgage crisis in the USA provoked a profound financial crisis in the country, which influenced foreign financial markets as well. In such a situation, the financial instability increased uncertainty of specialists in the further development of financial markets and financial services faced a serious problem of the retardation of the development of financial markets worldwide and decrease of financial activities. At the same time, international financial markets suffered from the dramatic changes in the price of products which are strategically important for all countries of the world, such as oil.

The growing oil prices also produced a negative impact on the economic development of the US and contributed consistently to the current economic recession in the country affecting dramatically the situation in global financial markets. In fact, the oil prices have already hit the ceiling and reached the unprecedented peak of 100 USD/b. Obviously, in such a situation, it is very difficult to maintain a high level of the economic growth because the consumption of energy, which naturally means the consumption of oil and its products, at least remains stable or even growth, while the growing oil prices make the costs of production consistently higher. Taking into consideration the weakening currency rate of the US dollar, it should be said that the situation is absolutely unfavorable for the US economy. It proves beyond a doubt that the US economy has to overcome the current crisis and minimize the negative effect of the growing oil prices.

In this respect, it should be said that the growing oil prices and the weakening of the US dollar have caused another serious problem the high inflation rate, which has reached 5,8% in 2007 . At this point, it is important to lay emphasis on the fact that the US dollar is the main currency used in the global market. In other words, the US dollar is the main world’s transactions currency. Hence, the devaluation of the US dollar produced a direct impact on the international financial markets and services.

In such a way, the galloping oil prices, which, though have decreased recently, and the devaluating US dollar aggravated the situation in international financial markets and financial services even more. In this respect, one of the dominant trends in the financial services at the period of the economic recession was and still remains the return of the capital from abroad to the US and other developed countries, which renowned for the export of capital at the epoch of the economic growth. In fact, the level of foreign direct investments has decreased dramatically in recent months as the economic recession progressed. Therefore, the US and leading countries of the UK as well as developed countries, such as Japan, needed to return their financial resources from developing countries as well as developed countries where they invested their capitals. At the same time, the withdrawal of capital had a very negative impact on financial markets and aggravated the economic recession even more. In addition, the macroeconomic instability contributed to the further deterioration of the situation in international financial markets and financial services, while the devaluation of the US dollar affected international trade.

In such a situation, international financial services faced an unparalleled problem of growing losses and decreasing revenues. For instance, the financial service giant Merrill Lynch, announced billions of dollars in losses. Eventually, the agreement was reached for them to be taken over by Bank of America for only two-thirds of its market value. Moreover, other leaders of financial services announced of their problems. For instance, the bank Lehman Brothers shocked the financial markets by filing for bankruptcy, crushed under huge debts that totaled $613 billion (Latham and Braun, 2008). The similar problems faced the insurance giant AIG which was rescued by the Federal Reserve’s injection of $85 billion and gain of 80% stake in the company (Latham and Braun, 2008).  The same trends of falling down of leading financial services companies, banks and insurance groups, could be traced worldwide, especially in well developed countries.

Taking into considerations the major causes of the financial crisis and economic recession, the negative effects of speculations on financial crisis become obvious. To put it more precisely, it is financial speculations that led to the galloping prices on strategically important products, such as oil, for instance. In this respect, it is worth mentioning the fact that the rapid changes of oil prices produced a profound impact on national economies of countries importing oil because the growth of oil prices influenced the inflation rate in these countries, costs of production and transportation that naturally led to the growth of prices of other products. In addition, the rapid growth of oil prices put companies depending on oil in an extremely disadvantageous position, while companies selling oil and oil-related products benefited consistently from the growth of oil prices. Nevertheless, eventually, the speculative growth of oil prices undermined the normal development of national economies, including the US economy.

On the other hand, as the economic recession and financial crisis progressed the oil price has dropped dramatically from USD 147 to about USD 40. It proves beyond a doubt that such a consistent change of oil price cannot be explained by any other logical reason but speculation. At this point, it is worth mentioning the fact that the change of demand and supply do not reflect or explain such a change of oil price.

At the same time, speculations could be observed not only on the oil market. In fact, the housing market was susceptible to similar trends, but, in case of housing market speculations were rather one of the factors but not the only factor that has determined the downfall of housing market in the USA. Nevertheless, it is obvious that speculative trends proved to be very significant and produced a significant impact on the development of financial crisis. In fact, speculations aggravated negative trends which emerged in the result of the mortgage crisis in the USA.

Thus, taking into account all above mentioned, it is possible to conclude that the financial crises in 1997-1998, 2002-2003 and the recent financial crises are closely intertwined with the development of the process of globalization and growing interdependence of countries. At the same time, these crises have revealed the existing disparity between developed and developing countries. Nevertheless, all countries proved to be vulnerable to the negative impact of the financial crises. On the other hand, causes and factors influencing the development of the financial crises were, to a significant extent similar, including the currency rate destabilization, inflation, unemployment, deterioration of international trade and trade balance, speculations and others.

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