@n Lurope llnance Crlsls ln relaLlon wlLh ueveloplng CounLrles lrom CaplLal MarkeL and Macro

economlc erspecLlve
l sLracL
ll rolem Cvervlew
lll Causes of Lhe Crlsls
lv lmpacL on ueveloplng CounLrles
v ollcy 8ecommendaLlon
vl 8eference


l sLracL
keceotly otopeoo Jebt ctlsls bove tolseJ eootmoos coocetos oboot tbe tobostoess
of tbe qlobol floooclol system 1be weokoesses of tbe wbole system bove beeo
exposeJ ooJ ooolyzeJ by ecooomlsts 8ecoose mooy ottlcles ooJ stoJles bove beeo
cooJocteJ to lo Jeptb covet tbe ptoblem beoce lt ls oooecessoty to oqolo exomloe
tbe mottet 1betefote tbls essoy boseJ oo otbet teseotcbes bopefolly wlll qlve oo
ovetvlew of cotteot otopeoo mooetoty cbolleoqes wltb teqotJ to Jeveloploq
cooottles lo cootext of moctoecooomlc ooJ copltol motket foooJotloo os o
coocetoloq lssoe

ll rolem ueflnlLlon
1he Lu crlsls was seL off as Lhe real esLaLe ule ln Lhe uS collapsed whlch had
een orlglnaLed wlLhln a speclflc secLor of Lhe merlcan morLgage markeL Lhe su
prlmes markeL 1he crlsls peaked ln CcLoer 2008 when Lhe merlcan auLhorlLles
declded noL Lo all ouL Lhe lnvesLmenL ank Lehman 8roLhers Lhough prevlously
Lhey had declded Lo all ouL several flnanclal lnsLlLuLlons such as lreddle Mac and
lannle Mae 1hls declslon had desLalllzed Lhe world's flnanclal markeL

8y Lhe end of 2008 Lhe flnanclal crlsls sLarLed Lo pressure Lhe real economy ln
2009 gloal Cu conLracLed y 06 Lhe flrsL gloal recesslon slnce Lhe Second
World War (ulck 2009) Powever Lhe crlsls dld noL affecL all counLrles ln Lhe same
way whlle developed counLrles suffered a ma[or conLracLlon of Lhelr economles
emerglng counLrles coped raLher well 1he Lu's Cu decllned y 41 oland elng
Lhe only Memer SLaLe Lo record poslLlve growLh 1he average unemploymenL raLe
ln Lhe Lu rose from 61 ln 2008 Lo 10 ln 2010 (ln Lhe uS 38 Lo 97) 8eLween
2007 and 2010 pullc deL ln Lhe euro area rose from 63 Lo 83 of Cu (ulck
2009)

lll Causes of Lhe Crlsls

1o flgure ouL Lhe rooL causes of Lhe prolem lL ls essenLlal Lo look ack aL Lhe Llme
when Lhe euro was flrsL roughL ouL ln 2002 ll of a sudden you could lend money
Lo lreland or Creece wlLhouL havlng Lo worry aouL Lhe lrlsh pound or Lhe Creek
drachma 1hey were all uslng Lhe euro whlch was managed y Lhe Cermans ln
addlLlon Lhe euro made orrowlng easler ln many MemerSLaLes rlor Lo
adopLlng Lhe euro Lhe dlsLlngulsh lnLeresL raLe ls acLually an effecLlve measuremenL
Lo dlfferenLlaLe MemerSLaLes' flscal and moneLary pollcles
1hlngs egan Lo change fasL when houslng prlces from 2000 Lo 2007 also rose
rapldly y 84 ln Creece and 98 ln lreland whlle edglng up y only 4 ln
Cermany (Luropean Commlsslon 2009) eople sLarLed uylng houses 8ullders
egan puLLlng Lhem up all over Lhe place rlces were golng up lL was slmllar Lo
whaL happened ln Lhe uS uL aL a greaLer exLend lreland for example had always
een a relaLlvely poor counLry 8uL y 2007 rlslng house prlces had Lurned Lhe lrlsh
on paper lnLo Lhe rlchesL people ln Lurope (kel 2011)
Powever Lhlngs goL worse when Lhe usL came Lo Lurope downLurn Lhe
relaLlvely small corner of Lhe flnanclal sysLem whlch was Lrlggered y Lhe uS
suprlme markeL was sufflclenL Lo Lopple Lhe whole sLrucLure 1haL Llme Lhe
Luropean anks were holdlng a remarkale amounL of morLgage deL 1he Lroule
was deLors herey are Lhe socalled llCS governmenLs (orLugal lreland lLaly
Creece and Spaln) dldn'L have enough lncome Lo pay lL(kel 2011) s a resulL of
caplLal losses Lhe largescale anks lnvesLor would have gone ouL of uslness

Clearly ln Lhe case of Creece deL was already very hlgh efore Lhe onseL of Lhe
crlsls over 100 of Cu (Luropean Commlsslon 2009) neverLheless wlLh plenLlful
credlL aL low lnLeresL raLes Lhese counLrles hadn'L effecLlvely lnvesLed and done
llLLle Lo reform Lhelr domesLlc economles 1herefore as Lhe deflclL lncreaslngly rose
deL urdens plled up ln oLh governmenL and prlvaLe secLor ConsequenLlally
Creece was Lhe flrsL Lo Lake a mulLlllllon pound allouL from oLher Luropean
counLrles followed y orLugal and lreland
lrom whaL happed Lo Luropean caplLal markeL lL ls plauslle Lo suggesL LhaL flnance
crlsls ls as a resulL of macroeconomlc lmalance 1he Luropean flnanclal crlsls has
een preceded y a perlod of parLlcularly favorale economlc condlLlons marked y
rapld credlL growLh aundanL llquldlLy low lnLeresL raLes and Lhe developmenL of
real esLaLe ules 1hese facLors conLrluLed a greaL deal Lo Lhe flnanclal crlsls
1hey have een Lhe resulL of oLh expanslve moneLary pollcles ln developed
economles and gloal macroeconomlc lmalances
lv lmpacL on developlng counLrles
1he prolems caused y crlsls LhaL Lu memers are elng suffered are ovlous
when Lhelr compeLlveness ranklng wenL down exLernal deflclL lncreases and pullc
flnance ls deLerloraLed 1herefore lL ls plauslle Lo sLudy oLher lmpacLs of Lhe
Luropean flnanclal crlsls upon oLher parL of Lhe world especlally on developlng
counLrles whlch lncludlng our counLry
s a consequence of crlsls Lhe Luropean growLh ls llkely Lo e deducLed aL leasL 1
percenL and poLenLlally much more Meanwhlle Lurope consumes more Lhan 27
percenL of developlng counLrles' exporLs ln addlLlon Lhe euro has already devalued
more Lhan 20 percenL agalnsL Lhe dollar slnce novemer 2009 and Lhe Lwo could
reach parlLy efore Lhe crlsls ls over (Conny 2009) lower euro wlll sharply reduce
Lhe proflLalllLy of exporLlng Lo Lhe Luropean markeL whlle lncrease compeLlLlon
from Lurope ln secLors ranglng from agrlculLure Lo garmenLs and lowend
auLomolles
lL ls noLlceale LhaL a lower euro wlll also reduce Lhe purchaslng power of Luropean
LourlsLs Lravellng Lo developlng counLrles LhaL wlll affecL Lhe Lourlsm lndusLry

neverLheless aL Lhe same Llme a lower euro may provlde opporLunlLles for
consumers and flrms Lo lmporL from Lurope aL a lower cosL 1he Luro crlsls wlll
force Lhe Luropean CenLral 8ank Lo malnLaln a very low pollcy lnLeresL raLe LhaL may
lead even more caplLal Lo flow Lo Lhe fasLesLgrowlng emerglng markeLs (Conny
2009) 1hls wlll lead Lo lnflaLlon and currency appreclaLlon pressures as well as
lncrease Lhe rlsk of asseL ules and evenLually of sudden caplLal sLops ln
emerglng markeLs

v ollcy 8ecommendaLlon
1o cope wlLh crlsls Lhe developlng counLrles should rely less on exporLs Lo Lhe
lndusLrlal counLrles and focus more on oLher developlng economles lso some
flnanclal ad[usLmenLs have een propose such as maLch Lhe currencles of forelgn
llalllLles wlLh Lhose of exporL proceeds and reserve holdlngs moderaLe Lhe lnflow
of porLfollo caplLal and encourage Lhe more sLale form of forelgn dlrecL lnvesLmenL
lnsLead(Conny 2009) ln addlLlon Lo avold Lhe prevlous fallure of Lhe developed
counLry Lhe governmenLs should closely monlLor and LlghLly regulaLe Lhe operaLlon
of forelgn anks and Lhelr llnks wlLh domesLlc anks

vl 8eference

ulck k nanLo (2009) 1he Cloal llnanclal Crlsls nalysls and ollcy lmpllcaLlons"
k5 kepott fot ooqtesshLLp//wwwfasorg/sgp/crs/mlsc/8L34742pdf

Luropean Commlsslon (2009) Lconomlc Crlsls ln Lurope Causes Consequences
and 8esponses" otopeoo cooomy 7
hLLp//eceuropaeu/economy_flnance/LhemaLlc_arLlcles/arLlcle13893_enhLm

Conny 8euLer (2009) 1he Lconomlc Crlsls and lLs lmpacL on ueveloplng CounLrles"
hLLp//europeansforflnanclalreformorg/en/sysLem/flles/SCLlu8_rleflng_paper_l
mpacL_of_economlc_crlsls_on_developlng_counLrlespdf

kel kelly (2011) 1he Luro ueL Crlsls and Lconomlc 1heory" 1be Motket Otocle
Moqozloe hLLp//wwwmarkeLoraclecouk/rLlcle26087hLml

Warren (2011) Luropean deL crlsls Causes and Cures" lotetoet Attlcle
hLLp//wcoaLswordpresscom/2011/08/27/europeandeLcrlslscausesandcures/