How and why did various crises (e.g. US subprime, Eurozone) escalate from national to global levels? Flashcards
1
Q
How and why did various crises (e.g. US subprime, Eurozone) escalate from national to global levels?
A
- Financial Interconnectivity and Globalised Markets -
o Global financial ties - through investments, credit agreements, and asset trading
o Contagion through financial instruments - securities in US housing market lost value due to collapse - caused global losses
o Globalised banking sector - banks stopped lending to each other if one bank faced trouble - Transmission through interbank lending and credit markets -
o Global Credit Markets - CB had to step in to provide liquidity when interbank lending didn’t
o Liquidity shortages - banks relied on interbank lending for liquidity - stopped due to uncertainty - Institutional and Policy-Driven connections -
o CB and currency unions - Eurozone - Greece couldn’t devalue their currency due to shared euro - harder to reduce debt or improve competitiveness
o Shared institutions and bailouts - Euro crisis required help from ECB and IMF - caused economic tensions - Global Trade and Investment Channels -
o Interdependence in trade - if one country’s economy slowed, it reduced demand for imports = affected global exporters
o Impact on emerging markets - they faced capital flight, causing currencies to drop and inflation to rise - Psychological and Perceptual Factors (Contagion) -
o Panic and Loss of Confidence - causes investors to pull out money everywhere
o Perception of systemic risk - fear one institution’s collapse could trigger domino effect - restricting their global lending - Delayed or insufficient policy response -
o Inadequate early intervention - GFC - early responses too slow and uncoordinated - worsened crisis
o Austerity measures in Eurozone - deepened their recessions and slowed global recovery
