The financial crisis stemming from the burst of the housing and credit bubble lead to a shutdown of the credit markets and spread around the globe, with the resultant massive destruction of equity and real estate wealth. The drastic crisis of investor confidence triggered massive selloffs in the stock markets around the world. The markets, which were integrated into the global financial economy, got hit first. However, even those which were weakly integrated got adversely affected due to transmission of the crisis through the real sectors.
The real sector transmission of the crisis has manifested itself in the plunge of exports and commodity prices due to the slump in global demand, shrinkage in foreign direct investments and portfolio flows. On the financing side, the global crisis of confidence lead to a sharp rise in cost of borrowing in the credit markets, with a rationing of emerging and pre-emerging economies out of the credit markets altogether.
The global crisis is unlike anything we have witnessed since the Great Depression, and every region of the globe has been hit. The global slump in demand and plunging global trade has hurt countries in East Asia and Latin America. Eastern and Central European countries, such as Hungary, the Czech Republic, and Poland got hit even harder as a result of diminishing exports to Western Europe. They also got caught up caught up in the misfortunes of major European banks which themselves had experienced huge losses due to exposures to the mortgage backed securities in the United States.
What is particularly stunning was the impact of the global crisis on the private capital flows to emerging markets. These flows were $928 billion in 2007 but dropped to $466 billion in 2008 almost a 50% drop. Correspondingly, foreign holdings of US T-bills rose by $456 billion in 2008, almost to the same magnitude as the decline in private capital flows to emerging economies. Ironically, the US Treasury securities benefitted from the US being the epicenter of the global financial crisis. At the global aggregate level, the IMF and the World Bank figures indicate that the world economic growth moving into a negative territory, the worst economic performance of generations. Moreover, according to the newly released World Bank report, the global economy would shrink in 2009.
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Financial Crisis and Stock Markets: Issues, Impact, and Policies
