16 August 2007
Global financial markets faced a real crisis last week, which nearly caused the bankruptcy of old and large firms. Several funds that were active in the past few years collapsed as a result of the subprime mortgage loan problems in the US.
The situation could have resulted in major damages to global economies, but it was the swift action taken by governments worldwide that saved them.
The problem emerged in the United States with the announcement early this month of the bankruptcy of American Home Mortgage Corp, and the retrenchment of 7,400 employees. Its shares dropped from $36.4 to $0.28 within a year.
Fears spread across Europe, Japan, Australia and even less advanced countries such as the Philippines and Indonesia, and their bourses dropped between three and 3.2 per cent, the highest in many years.
This is why the instant recovery operation came from all these countries. The US Federal Reserve was quick to pump two payments, but the major contribution came from Europe with over 100 billion euros, and more than $8 billion from the Central Bank of Japan, to avoid the risk of world financial markets collapsing.
This was followed by further action from the central banks in China, Malaysia and Australia. Contradictions and economic clashes of interest were forgotten. This may be one of the advantages of globalisation, which merged world economies and made it a must for all to cooperate at the time of crisis.
But, where did the problem stem from? Lately, some financial institutions extended their high-risk mortgage loans, with the purpose of increasing profits and imposing high interest rates on people without good credit records.
Those companies started suffering difficulties, which caused an unaffordable increase in interest rates between banks.
This could, in turn, result in their bankruptcy and major damages to global credit markets in general, due to the impact of the US economy in the world. The US bourse and the world's top bourses were the first to drop.
Central banks pumped $275 billion, to provide the necessary cash without high financial risks and protect the society from any negative impacts, while maintaining the safety of the world monetary order.
The GCC and Arab world are lucky that the crisis took place during the weekend, otherwise a similar drop in financial markets in Arab countries would have happened.
The issue of globalisation is quite entangled with this crisis and its effects. Analysts and intellectuals disagree on globalisation. While some see it as pure evil, specially to developing countries, others consider it a merger for world countries, providing opportunities and challenges.
In this age of openness, IT and media, globalisation is a fact we must deal with. Its effects will extend to all countries, as we have seen in this crisis, and hedge funds, banks and financial and economic institutions have recently acquired an unprecedented global aspect.
It is natural at this stage to say that good economic relations between countries provide a chance to resolve financial crises that could hit anywhere due to the expansion of the global economy.
Everyone must learn a lesson from this crisis, specially Arab and developing countries, since most of them do not have enough cash flow to rectify the situation in case of a financial crisis in their markets.
This is particularly significant because, with the exception of oil producing countries and emerging economies such as China and India, the rest of the developing countries have very little impact on international economic relations.
The writer is a UAE economic expert.
By Dr Mohammad Al Assoumi
Gulf News 2007. All rights reserved.
