TO UNDERSTAND THE CURRENT GLOBAL

FINANCIAL ISSUES AND ITS EFFECTS TO

THE LOCAL ECONOMIES “CURRENT
GLOBAL FINANCIAL IMBALANCES;
CAUSES, CONSEQUENCES, AND
SOLUTIONS

By: Edrian Joseph Aragon

Earl Anthony C. Adelantar
Table of contents

01 02
Financial
03
Introduction Causes
Imbalances

04 05
Consequences Solutions
 Global
financial
crisis
a financial crisis that affects many countries at the same time.
It is a period of severe difficulties which financial institutions,
markets, companies, and consumers experience
simultaneously
Global financial crisis

• During a global financial crisis, financial institutions lose faith and stop
lending to each other and traders stop buying financial instruments.

• In a financial crisis, asset prices see a steep decline in value,

businesses and consumers are unable to pay their debts, and financial
institutions experience liquidity shortages.

• Often associated with a panic or a bank run during which investors sell
off assets or withdraw money from savings accounts because they fear
that the value of those assets will drop if they remain in a financial
institution.
Financial Crisis:
Features

 Credit volumes change significantly.

 Asset prices decline considerably.
 There are serious disruptions in financial
intermediation.
 There is a severe disruption in the supply of
external financing to many players in the
economy.
 Households, companies, financial
intermediaries, and sovereigns experience

large scale-balance sheet problems.

Financial Imbalances:

Understanding these imbalances

is essential for investors,
policymakers, and anyone
interested in global financial
stability.
 Financial Imbalances
● Trade imbalances - persisted, with some countries running large trade surpluses (e.g., China
and Germany) while others had significant trade deficits (e.g., the United States). These
imbalances could lead to currency fluctuations and trade tensions.

● Currency Volatility - Exchange rate fluctuations, driven by trade imbalances and monetary
policies, could disrupt global trade and investment flows.

● Digital Transformation - The rapid growth of digital technologies and cryptocurrencies raised
questions about financial stability, regulation, and the potential for disruptive innovations in the
financial sector.
● Emerging Markets Vulnerabilities - Some emerging markets were particularly vulnerable due
to high levels of foreign-denominated debt, reliance on commodity exports, and political
instability.
Asset Price Inflation - Loose monetary policy and low interest rates had
driven up asset prices, including stocks and real estate, potentially
creating bubbles in some markets. This could lead to financial instability
if these bubbles burst.

Low Interest Rates - Central banks in major economies had maintained

historically low interest rates for an extended period to stimulate
economic growth. While this was necessary during the COVID-19
pandemic, it also posed risks, including the potential for asset bubbles
and inflation.
 Causes:
Currency Income
Fiscal Policies
Manipulation Inequality

Savings and Financial

Investment Market
Pattern Distortion
Consequences:
 Unemployment
 Inflation and Deflation
 Economic Slowdown
 Financial Market
Turbulence
 Interest Rate Changes
 Changes in Capital Flow
 Solutions:
In the current conjuncture where many
countries are near full employment and have
more limited room to maneuver in their public
budgets, governments need to carefully
calibrate their policies to achieve domestic and
external objectives, while rebuilding monetary
and fiscal policy buffers. In particular:
 Solutions:
 Countries with lower-than-warranted external current account balances should
reduce fiscal deficits and encourage household saving, while monetary
normalization proceeds gradually.

 Where current account balances are higher than warranted, the use of fiscal space,
if available, may be appropriate to reduce excess surpluses

 Well-tailored structural policies should play a more prominent role in tackling

external imbalances, while boosting domestic potential growth. In general, reforms
that encourage investment and discourage excessive saving—through the removal
of entry barriers or stronger social safety nets—could support external rebalancing
in excess surplus countries, while reforms that improve productivity and workers’

skill base are appropriate in countries with excess external deficits .