Financial Crises and Firm Performance
Financial crises could happen anywhere, although emerging markets tended to be more seriously afflicted in recent times •
Companies operating in a region where a financial crisis had broken out could undergo corporate disasters as a result. •
The following sections describe what happened during three major financial crises in the late 1990s and early 2000s, and how the business sectors of the regions were affected. •
The best-known of these crises are those that hit Latin America in the 1980s, Mexico in the mid-1990s, several Asian countries in the late 1990s, most transition economies in the mid-1990s, Russia in the late 1990s, and Argentina in 2002.
Types of financial crisis
Currency crises - occur when an attack on the exchange rate of an economy's currency results in a devaluation or sharp depreciation of the currency •
Banking crises- occur when bank runs or failures force banks to renege on their liabilities or force governments to intervene to keep the banking system from failing. •
Foreign debt crises- occur when a nation or region cannot service its foreign debt, typically due to a shortage of foreign exchange. •
Systemic financial crises occur when the financial sector gets so disrupted that it can no longer properly support the workings of the real economy. •
Financial crises often see exchange rates and asset values tumble, financial institutions fail, ripple effects hurt other types of companies, and substantial economic dislocation.
Causes of financial crises-
Unsustainable economic imbalances due to misaligned asset prices or exchange rates. •
Global financial fluctuations,
structural economic problems,
poor financial market supervision,
inappropriate behaviour within the financial sector,
and unsustainable macroeconomic policies are often contributing features. ((Macroeconomic policy) Any policy intended to influence the behavior of important macroeconomic variables, especially unemployment and inflation. Macroeconomic policies include monetary and fiscal policies, but also such things as price controls and incentives for economic growth.Policies designed to influence the level of employment, the price level, economic growth and the balance of payments.)
Macroeconomic instability is often accompanied by overly expansionary government policies, lending booms, over-investment in real assets, and a resulting overvaluation of assets. •
When such conditions are allowed to persist, a bubble emerges that eventually bursts, producing a crisis. •
Rapid changes in global interest rates and increases in short-term borrowings can also help create the conditions for a crisis. •
Financial crises often are coupled in that a crisis in one country often leads to, or seems to lead to, crisis in another. This can be due to two or more crises stemming from a common cause, from the deterioration of one economy directly affecting another economy, or a crisis in one country causing investors to reassess the risks they face in others. Impact of financial crises
The costs of financial crises can be enormous. In many cases, Gross Domestic Product (GDP) contracts by between five and 12 percent in the first year of the crisis, followed by slow growth for several years thereafter •
Of course, the cost of financial crises goes far beyond those associated with GDP reductions and expensive bank bailouts. •
In developing countries, financial crises can result in the virtual shutdown of a nation's financial system. This, in turn, can lead to the evaporation of savings and asset values, loss of investor and depositor confidence, massive bankruptcies, large-scale unemployment, a rise in poverty, and enormous social pressures that can lead to violence.
The Asian Crisis, 1997-98
By 1996, problems concerning balance of payments, poor corporate governance, non-performing loans, and asset price bubbles began to surface in some of...
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