Standard the “sub-citizens” to pay (Chambers, et al.,

Standard Bank
Financial Response towards National and International Financial Crunch
Circumstances

The
financial system sold the debt it carried from the sub-citizens to the
super-institutions, remunerating them with high interest rates, proportional to
the risk of the operation. When it was perceived that the debt of the
lower was not being validated, it was decided to sell the paper backed by the
ability of the “sub-citizens” to pay (Chambers, et al., 2012). Almost
simultaneously, everyone made the same decision. For obvious reasons, the
papers became almost worthless. When asset prices go into sharp deflation, it
is then said that the market has entered into liquidity crisis.

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Financial
institutions that were not hit so directly by the crisis are fearful, they
decided to retract their business: after all, when negotiating an asset, the
potential debtor may be a hidden “sub-citizen” or a crisis super institution,
but without external symptoms. If this applies to the financial system, it
also applies to the real sector of the economy. Anyone who had plans to
invest in productive capital will keep them in the drawer. The worker at
risk of income (unemployment) will reduce the demand to make a precautionary
fund. So the risk now is that there is a fourth crisis (Arsalidou, 2017). A
crisis of demand for labor, consumer goods and productive capital. The
most objective channel of contamination of this next crisis is the reduction of
supply and demand for credit, regardless of the interest rates charged or
offered. The other channel is subjective, it is the widespread mistrust of
the economy’s future purchasing power, that is, even those who do not need the
financial system to invest or to produce or to consume will tend to retract. Notice
to liberals: this crisis is a result of the lack of regulation on financial
super-institutions and the lack of public housing policies for
“sub-citizens”. It was the lack of action of the State and not
its active action that caused the crisis.

 

 

Financial
Services Polices of Government and Standard Bank towards Domestic Activities

Government
policies for the rescue of the financial system are all necessary. The
policies of buying papers that are not worth what market would pay back the
capital of institutions that could fail. Government budgetary benefits
that involve the procurement transactions of institutions within the financial
system are valid. Direct interventions with re-capitalization and takeover
by the state are indispensable. However, all these policies are limited
because the objective and subjective channels of contamination of the financial
sector for the real sector are already open (O’Mahony, 2014).

An
aggressive spending policy will be required. All rescue policies of
financial institutions can restore the health of the system, but are not able
to restore their activity. System sanitation is an objective, accounting
problem. However, their activity depends on feelings, conjectures and fears on
both the financial system and the real sector. All the liquidity that can restore
financial institutions and prevent the crisis from reaching the system as a
whole can be damped. Bankers and entrepreneurs have no interest in doing
business that may not be validated by the end consumer. The successful
exit should be a stimulation of private business stimulated by the public
sector, which should make expenditures, hire labor and transfer income to those
who have a high propensity to spend (who are “sub-citizens”) and
therefore not liquidity.

In the
last five years, the effects of the international financial crisis have hit the
African economy. At the end of August the dollar was still quoted at
around $ 1.60. It ended up closing on October 18, 2008 around $
2.30. A further 30% devaluation in just over forty days. Consequence
of the “fluctuating exchange that floats”, some would
say. However, contrary to the paladins of the regime of exchange rate
fluctuation, this rapid and disorderly devaluation of the exchange rate has had
destabilizing effects on the African economy. Several companies in the
productive sector, especially the exporting companies, suffered significant
losses from the devaluation of the real (Kampanje, 2012).

This
is because the exporting companies carried out excessively forward
target operations, making a double bet on the appreciation of the
exchange rate. In the first bet, the companies sold dollars to the banks
through an instrument called forward. In other words, in this
operation the companies carry out a classic operation of selling the dollar in
the forward market, betting on the exchange appreciation with the purpose of
earning the interest of the operation, receiving, therefore, a financial income
(Howarth, & Quaglia,
2013). Another possibility arises from the reverse
currency swap operations carried out by the Central Bank (BC), which in
practice give companies a foreign exchange coupon in the case of a fall in the
dollar. These two operations, in themselves, do not represent high exchange
exposure if they are married to the dollar revenue that companies obtain from
exports. Already in a target forward operation, a second
operation follows the forward sale. Firms again sell dollars to banks in
the futures market by selling overdraft options, giving banks the right to buy
dollars in the future at a pre-set price.

From
this point of view, it is possible to answer one of the questions that most
intrigued economists over the last two years, namely: how were the exporting
companies surviving with a strong exchange rate appreciation in the period
2005-2007? They were offsetting operating losses on financial revenues,
being favored by a favorable environment evidenced in the domestic market, and
counting on signals from the government’s economic team that there would be no
strong currency depreciation (Howarth, & Quaglia, 2013). Even though they
knew of the huge exchange exposure to which they were subject, companies did
not expect, unlike in 1999, that the quotation would exceed the target.

In
light of these considerations, the following question can be asked: Is the African
economy effectively armored against the international financial
crisis? The answer is no. The African economy is not shielded against
the international financial crisis due to the financial fragility of
the productive sector, which is due to its excessive exposure to
foreign exchange derivative instruments. The companies used a process of
defense of margin of profit in the face of the continuous process of exchange
appreciation evidenced in the last two years, leading to a fall in the
companies’ operating income (Schoenmaker, 2013). We can therefore say
that the companies substituted operating income for financial income. In
addition, a second factor that contributed to this exposition was evidenced:
the generalized optimism of the market, optimism is sanctioned by the Federal
Government. It was in this context that companies reduced their security
margins and, under this approach, we assert that the shielding myth ignored the
fragility of the nonfinancial private sector. The African crisis is
endogenous, due to the growing financial fragility of the private sector and
the exposure to foreign exchange risk.

 

African Scenario
Regarding Financial Crisis

The South African economy showed a sharp
decline by the end of 2008. A broad cyclical the decline has been noticeable
since the end of 2007, but in September 2008 the world became global financial
crisis is bursting out and the world economy is scouring. The South African
economy recorded its first quarterly decline (-1.8%) in ten years in the fourth
quarter of last year and the annual growth rate decreased to 3.1% – after
growth of about 5% per annum for four consecutive years calendar years.
Although shortages in electricity supply during the first part of 2008 were
severe disruption caused in economic growth, the decline in economic activity
for the full year was especially apparent in the growth rate of real household
consumption, which decreased from 6.6% in 2007 to 2.3% – an indication that the
level of real consumer spending in fact during the second half of the year
shrunk (Duran, & Garcia-Lopez, 2012).

The contraction has worsened during the first
quarter of 2009. The growth rate in real fixed investment (the private and
public sector jointly) decreased from above 16% in 2007 to 2.6% in the first
quarter of 2009. To further rub salt into the wounds, exports sharply declined
in the last quarter of the year and the first quarter of 2009 in response the
severe global economic recession that was unfolding. Businesses had to storm
turbulent water in recent years and with unstable economic conditions worldwide
remain uncertain. Global real GDP has been estimated an annual rate of 6.7%
during the fourth quarter of 2008 shrank and 5.6% in the first quarter of 2009.
The advanced economies took the lead with the economic downturn operations. The
global economic recession has been synchronized and the worst since the Second
World War. World trade and money flow fell sharply, while commodity prices
dropped and production and job losses continue to increase.

 

Reactive
Policies towards Business Acquisition of Bank

The adverse economic consequences are worse
in developed economies, although emerging economies are also affected by the
close trade and financial ties what exist the commodity price-driven inflation
cookie that hit the world between 2006 and 2008 has been spectacularly reversed
and around the world are central banks, fiscal authorities and multilateral
financial institutions struggled to combat deflationary tendencies. From March
2009 the global economic crisis has apparently stabilized and has optimism begins
to increase that a recovery is at hand (Yan, et al., 2012). While the South
African economy was somewhat hedged against the primary driver of the worldwide
financial crisis (the burden of the US subprime financial soap bubble), it is
fully exposed to the indirect consequences of export demand and prices as a
result of global recession conditions and the contraction in capital flows.

The local manufacturing sector has a
particularly strong decline experienced the last quarter of 2008 and business
indices in the sector in the first quarter of 2009 dropped to the lowest level
in a decade. While growth in real consumption expenditure slows down and retail
business has shrunk, is a measure of resilience in the first quarter of 2009
detected. Prospects are, however, clouded by the further reversal of production
and threatening job losses. A number of positive fundamental factors improve
prospects for South Africa, which is slightly different would be worrisome
(Kupakuwana, 2012). In the first place, South Africa’s banking sector has an
insignificant direct exposure to the subprime financial crisis, it is well
capitalized and is expertly regulated. While the rand exchange rate initially
experienced a setback, its resilience in the reflecting the global financial
crisis as well as the return of inward equity investments in the first quarter
of 2009 promised.

Thirdly, South Africa’s public sector has
already begun with an aggressive firm investment program that will counteract
some of the negative trends in the private sector. As encouraging as these
fundamental factors are, the magnitude and intensity of the prevailing risks
caused by the global financial and economic crisis are profound. For South
Africa, these risks concern exports and the availability of foreign capital
around the finance large current account deficits.

The internationalization of the financial
system has substantially changed the nature and deter- minutes the global
economic dynamic: the combination of deregulation of markets financial and financial
innovations – such as securitization and derivatives – free mobility of capture-and
such flexibility and volatility of exchange rates and interest rates have on
the one hand, limited to action of domestic macroeconomic policies and on the
other, was responsible for both the frequent crises balance of payments in
emerging economies, as the liquidity and solvency crises, as the recent
international financial crisis. This process of financial globalization, in
which financial markets are integrated in such a to create a “unique”
world market of money and credit, has, in turn, before a framework in which
there are no monetary-financial rules and stabilizing foreign exchange and
instruments traditional macroeconomic policy become increasingly insufficient
to contain the financial collapse and currency) worldwide, resulting in
effective demand crisis. JM Keynes, in his General Theory of Employment,
Interest and Money 1936, already called the attention to the fact that, in
monetary economies of production, the organization of financial markets CIAL
faces a trade-off between liquidity and investment: on the one hand, they stimulate
the development of productive activity by making the most liquid assets,
freeing therefore the investor irreversibility of the investment; on the other,
it increases the speculative gains possibilities (Al Amine, 2016).

At- rather, to establish a connection between
the financial markets and real economy, Keynes, in Theory General, wrote that
“the position is serious when enterprise becomes a bubble on the
speculation. When the development of the activities of a country becomes the
by-product of activities of a casino, the job is likely to be sloppy. “Going to
meet Keynes, today, the action of the global players in a more market integrated,
makes the financial markets should be converted into a kind of big global
casino. Speculation, in a global economy, disruptive character has not only
domestic, but on countries as a whole, creating a sort of financial casino
expanded. In the Keynesian perspective, financial instability is not seen as
“anomaly” but as own mode of operation of financial markets in a
system in which there is no a safeguard structure that performs the role of a
market marker global (Wahlström, 2013). Thus, the format instituted specific
financial markets determine the possibilities of having an environment where
speculation can flourish. Financial crises are not just results of behaviors,
“irradiated “agents, but derive from the very form of operation of
global financial markets liberalized without an appropriate control system.

These high-risk roles and remuneration
comprised the assets of many financial institutions in the United States.
Liabilities values are stricter than assets. On the one hand, most part of the
assets of financial institutions is quoted by the market on the other, their
liabilities are registered contracts. Thus, assets and liabilities are
unbalanced (Makhaya, & Nhundu, 2015). This is what made the capital various
institutions insufficient to guarantee the continuity of its operations. The
third crisis, then, entered the economy: the equity crisis. First it was the
credit crisis, which turned into crisis that liquidity, in turn, turned into
equity crisis (Mehta, et al., 2012). Financial institutions were not affected
so directly by the crisis are fearful, retract their business: after all, when
negotiating an asset, the potential borrower may be a hidden or in crisis, but
no outward symptoms. If this is true for the system financial, also applies to
the real sector of the economy. Who had capital investment plans production
will keep them in the drawer.

 

Conclusion

Policies purchase securities that are not
worth what the market would pay restore the capital of institutions they could
fail. Budgetary largesse of government involving transactions of acquisitions
institutions within the financial system are valid. Direct interventions
re-capitalization and takeover by the state are indispensable. However, all
these policies are limited because of the objective and subjective channels of
financial sector to the real sector contamination already so open. An
aggressive fiscal policy spending will be required. All instituted rescue
policies can restore financial system health, but are not able to restore its
activity (Blommestein, 2012). The sanitation system is an objective problem,
accounting. However, their activity depends of feelings, assumptions and fears
of both the financial system as part of the sector real. All the liquidity that
can restore financial institutions and prevent the crisis reaches the system in
its entirety may be repressed. Bankers and businessmen are not interested in
doing heats that cannot be validated by the final consumer.

The successful output should be an actively
of private business stimulated by the public sector, which should take
spending, labor-hire work and transfer income to those who have a high
propensity to spend (which are the “sub-citizens) and, therefore, They
will not impound liquidity. Should the US government policies are the financial
system restore only, US economy will be skating for a while, which can be long.
The economy Japan has shown and has shown that not worth the wait (Thakor,
2015). The difference taught by JM Keynes between policies to expand the
liquidity and fiscal spending policies is that the former are dependent teeth
reactions, sometimes overly pessimistic or cautious private sector, while
latter represent “direct remedy in vein”, i.e. direct purchases to
the private sector, hiring hand labor or cash transfers to those who spend
everything they get and that there- to, activate the private business economy. 

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