Question A If a person was to ask me, define the financial crisis in a few words. I would tell him;

2300 WordsApr 23, 201910 Pages
Question A If a person was to ask me, define the financial crisis in a few words. I would tell him; it is a worldwide financial fiasco in which it includes terms such as: 1. Subprime mortgages 2. Collaterised debt obligations 3. Frozen credit markets 4. Credit default swap Peter Praet, who is a member of the Executive Board of the European Central Bank (ECB), said that the Eurozone crisis was initiated when the US mortgage market crumpled as: “A complex network of financial derivative products held globally, started to un-ravel, US mortgage crisis was only the tip of the iceberg”. Before 2007, Europe was enjoying a long period of: • Swift credit progress • Low risk premiums • Good level of liquidity, high leveraging • Increasing asset…show more content…
2. Second layer: Later on, the failure of the Lehmann brothers in fall of 2008 initiated an “abrupt re-pricing of risks globally” – Peter Praet. This caused a temporary freeze in trade financing, a decline in transactions and ultimately it was noticed that demand & output on a worldwide scale dropped as well. 3. Third layer: Another bad news was revealed. Some companies and banks were not able to meet their long-term financial obligations, that is, solvency. This is a very important element to stay in the business environment. Peter Praet said that this was caused in 2 ways. First, banks were heavily exposed to national debt and declines in the value of government bonds. Secondly, when governments offered bailouts, they continued to add up to their own liabilities. 4. Last Layer: This is the most unanticipated layer of the iceberg, called as the “Redenomination risk” i.e. the possibility of the euro area disintegration. Did you know that this concern was brought up in the Eurozone last year? Charles Wyplosz, a professor of international economics, argues that the acquisition by European banks of securities backed by US mortgages spread the impact of the US property price bubble to Europe, thus worsening the influence of Europe’s own house price bubble. You may ask but Germany & Austria never experienced such bubble and yet are sharing in the recession? According to Candelon & Palm the basic root

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