Economic Effects on V4 Countries

Topics: European Union, Slovakia, Poland Pages: 7 (2463 words) Published: March 25, 2013
Slovak University of Agriculture in Nitra|
The effects of the economic crisis on V4 countries|
Alina Cioată - ERASMUS|


Macroeconomic issues in V4 countries
November 2012
Nitra, Slovakia

It is enough just to turn on the TV or to read a newspaper to be able to know which is one of world’s major problems nowadays. It might be call economic crisis or financial crisis or recession but all these names cover a single situation: the impossiblity of living decently in many of the countries in the European Union or worldwide.

As we know the global recession has been going on for quite some time at this point. But what was the cause of this global crisis? The answer is very simple at the beginning: it started when people could not pay their mortgage rate anymore in the United States. Somehow this problem could have been avoided if people would not have ignored the warnings from financial experts and scholars. With all the warnings, the situation was quite a big surprise because the effects were bigger than everyone had expected. But there are some reasons behind the scene that led to the big issue of mortgage rates. Among the main traditional causes of the economic and financial crisis are: the credit boom to excessive large scale; the sharp rise in asset prices, particularly in the housing market; lending over the exposures limits to economic agents or persons less solvent or even non-solvent (the sub-prime mortgage debtors); the failure in market discipline; the distortion of risk information and asset pricing. Regarding the non-traditional causes, especially the ones related to the financial crisis, we can mention, first of all, the extent and depth of the sub-prime crisis concerning: the uncontrolled growth of origin-and-distribute model; an inordinate appetite for profit that has fuelled the growth in demand for high risk assets; the ex-ante ignorance and ex-post uncertainty regarding the risk associated with stock market values, based on mortgages, derivative financial products and credit-default swaps transactions; the lack of an appropriate corporate governance and the excessive incentives for the financial institutions managers. Here is a simple scheme of how everyone got to be affected by these causes. In USA, investors did not find attractive anymore buying treasury bills from the Federal Reserve because the Federal Reserve chiarman lowered the interest rate to 1% to keep the economy strong. But for the banks this was a good situation because they could get and give cheap credits. And this amplified the leverege effect (borrowing money to amplify the outcome of a deal). So investment banks saw this as a big change for their incomes. They decided to buy mortgages from lender banks that lent money to home owners, so they got the payments of the mortgages. The banks ensured their package for payments (named credit default swap) according to a rating. The safest packages had an interest rate lower than the rest so they started to sell them to other investors. In this situation the investors were happy because the investment was way better than the 1% interest rate for the treasury bills so they want more mortgage packages. But the mortgage brokers could not find among realiable pleople called prime mortgages so they started to look among sub-prime mortgages (people less responsible) to sell them houses. This was the breaking point because the sub-prime morgages turned out not to be able to pay they debts back to the banks so the payment transformed into a house. And not only into a house but into plenty of houses because more and more people could not pay they mortgage anymore. The bank had to sell these house and because there were much more houses than the demand, the price dropped down. And even those people who could pay the mortgage did not find correct to pay the same amount of money when their house valued less so they decided to...
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