Standard BankFinancial Response towards National and International Financial CrunchCircumstancesThefinancial system sold the debt it carried from the sub-citizens to thesuper-institutions, remunerating them with high interest rates, proportional tothe risk of the operation.
When it was perceived that the debt of thelower was not being validated, it was decided to sell the paper backed by theability of the “sub-citizens” to pay (Chambers, et al., 2012). Almostsimultaneously, everyone made the same decision. For obvious reasons, thepapers became almost worthless. When asset prices go into sharp deflation, itis then said that the market has entered into liquidity crisis.Financialinstitutions that were not hit so directly by the crisis are fearful, theydecided to retract their business: after all, when negotiating an asset, thepotential debtor may be a hidden “sub-citizen” or a crisis super institution,but without external symptoms.
If this applies to the financial system, italso applies to the real sector of the economy. Anyone who had plans toinvest in productive capital will keep them in the drawer. The worker atrisk of income (unemployment) will reduce the demand to make a precautionaryfund. So the risk now is that there is a fourth crisis (Arsalidou, 2017). Acrisis of demand for labor, consumer goods and productive capital. Themost objective channel of contamination of this next crisis is the reduction ofsupply and demand for credit, regardless of the interest rates charged oroffered.
The other channel is subjective, it is the widespread mistrust ofthe economy’s future purchasing power, that is, even those who do not need thefinancial system to invest or to produce or to consume will tend to retract. Noticeto liberals: this crisis is a result of the lack of regulation on financialsuper-institutions and the lack of public housing policies for”sub-citizens”. It was the lack of action of the State and notits active action that caused the crisis. FinancialServices Polices of Government and Standard Bank towards Domestic ActivitiesGovernmentpolicies for the rescue of the financial system are all necessary. Thepolicies of buying papers that are not worth what market would pay back thecapital of institutions that could fail. Government budgetary benefitsthat involve the procurement transactions of institutions within the financialsystem are valid. Direct interventions with re-capitalization and takeoverby the state are indispensable. However, all these policies are limitedbecause the objective and subjective channels of contamination of the financialsector for the real sector are already open (O’Mahony, 2014).
Anaggressive spending policy will be required. All rescue policies offinancial institutions can restore the health of the system, but are not ableto restore their activity. System sanitation is an objective, accountingproblem. However, their activity depends on feelings, conjectures and fears onboth the financial system and the real sector.
All the liquidity that can restorefinancial institutions and prevent the crisis from reaching the system as awhole can be damped. Bankers and entrepreneurs have no interest in doingbusiness that may not be validated by the end consumer. The successfulexit should be a stimulation of private business stimulated by the publicsector, which should make expenditures, hire labor and transfer income to thosewho have a high propensity to spend (who are “sub-citizens”) andtherefore not liquidity.
In thelast five years, the effects of the international financial crisis have hit theAfrican economy. At the end of August the dollar was still quoted ataround $ 1.60. It ended up closing on October 18, 2008 around $2.30. A further 30% devaluation in just over forty days.
Consequenceof the “fluctuating exchange that floats”, some wouldsay. However, contrary to the paladins of the regime of exchange ratefluctuation, this rapid and disorderly devaluation of the exchange rate has haddestabilizing effects on the African economy. Several companies in theproductive sector, especially the exporting companies, suffered significantlosses from the devaluation of the real (Kampanje, 2012).Thisis because the exporting companies carried out excessively forwardtarget operations, making a double bet on the appreciation of theexchange rate. In the first bet, the companies sold dollars to the banksthrough an instrument called forward.
In other words, in thisoperation the companies carry out a classic operation of selling the dollar inthe forward market, betting on the exchange appreciation with the purpose ofearning the interest of the operation, receiving, therefore, a financial income(Howarth, & Quaglia,2013). Another possibility arises from the reversecurrency swap operations carried out by the Central Bank (BC), which inpractice give companies a foreign exchange coupon in the case of a fall in thedollar. These two operations, in themselves, do not represent high exchangeexposure if they are married to the dollar revenue that companies obtain fromexports. Already in a target forward operation, a secondoperation follows the forward sale. Firms again sell dollars to banks inthe futures market by selling overdraft options, giving banks the right to buydollars in the future at a pre-set price.Fromthis point of view, it is possible to answer one of the questions that mostintrigued economists over the last two years, namely: how were the exportingcompanies surviving with a strong exchange rate appreciation in the period2005-2007? They were offsetting operating losses on financial revenues,being favored by a favorable environment evidenced in the domestic market, andcounting on signals from the government’s economic team that there would be nostrong currency depreciation (Howarth, & Quaglia, 2013). Even though theyknew of the huge exchange exposure to which they were subject, companies didnot expect, unlike in 1999, that the quotation would exceed the target.Inlight of these considerations, the following question can be asked: Is the Africaneconomy effectively armored against the international financialcrisis? The answer is no.
The African economy is not shielded againstthe international financial crisis due to the financial fragility ofthe productive sector, which is due to its excessive exposure toforeign exchange derivative instruments. The companies used a process ofdefense of margin of profit in the face of the continuous process of exchangeappreciation evidenced in the last two years, leading to a fall in thecompanies’ operating income (Schoenmaker, 2013). We can therefore saythat the companies substituted operating income for financial income. Inaddition, a second factor that contributed to this exposition was evidenced:the generalized optimism of the market, optimism is sanctioned by the FederalGovernment. It was in this context that companies reduced their securitymargins and, under this approach, we assert that the shielding myth ignored thefragility of the nonfinancial private sector. The African crisis isendogenous, due to the growing financial fragility of the private sector andthe exposure to foreign exchange risk. African ScenarioRegarding Financial Crisis The South African economy showed a sharpdecline by the end of 2008. A broad cyclical the decline has been noticeablesince the end of 2007, but in September 2008 the world became global financialcrisis is bursting out and the world economy is scouring.
The South Africaneconomy recorded its first quarterly decline (-1.8%) in ten years in the fourthquarter of last year and the annual growth rate decreased to 3.1% – aftergrowth of about 5% per annum for four consecutive years calendar years.Although shortages in electricity supply during the first part of 2008 weresevere disruption caused in economic growth, the decline in economic activityfor the full year was especially apparent in the growth rate of real householdconsumption, which decreased from 6.6% in 2007 to 2.3% – an indication that thelevel of real consumer spending in fact during the second half of the yearshrunk (Duran, & Garcia-Lopez, 2012). The contraction has worsened during the firstquarter of 2009.
The growth rate in real fixed investment (the private andpublic sector jointly) decreased from above 16% in 2007 to 2.6% in the firstquarter of 2009. To further rub salt into the wounds, exports sharply declinedin the last quarter of the year and the first quarter of 2009 in response thesevere global economic recession that was unfolding. Businesses had to stormturbulent water in recent years and with unstable economic conditions worldwideremain 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. Theglobal economic recession has been synchronized and the worst since the SecondWorld War.
World trade and money flow fell sharply, while commodity pricesdropped and production and job losses continue to increase. ReactivePolicies towards Business Acquisition of BankThe adverse economic consequences are worsein developed economies, although emerging economies are also affected by theclose trade and financial ties what exist the commodity price-driven inflationcookie that hit the world between 2006 and 2008 has been spectacularly reversedand around the world are central banks, fiscal authorities and multilateralfinancial institutions struggled to combat deflationary tendencies. From March2009 the global economic crisis has apparently stabilized and has optimism beginsto increase that a recovery is at hand (Yan, et al., 2012). While the SouthAfrican economy was somewhat hedged against the primary driver of the worldwidefinancial crisis (the burden of the US subprime financial soap bubble), it isfully exposed to the indirect consequences of export demand and prices as aresult of global recession conditions and the contraction in capital flows. The local manufacturing sector has aparticularly strong decline experienced the last quarter of 2008 and businessindices in the sector in the first quarter of 2009 dropped to the lowest levelin a decade.
While growth in real consumption expenditure slows down and retailbusiness has shrunk, is a measure of resilience in the first quarter of 2009detected. Prospects are, however, clouded by the further reversal of productionand threatening job losses. A number of positive fundamental factors improveprospects for South Africa, which is slightly different would be worrisome(Kupakuwana, 2012). In the first place, South Africa’s banking sector has aninsignificant direct exposure to the subprime financial crisis, it is wellcapitalized and is expertly regulated. While the rand exchange rate initiallyexperienced a setback, its resilience in the reflecting the global financialcrisis as well as the return of inward equity investments in the first quarterof 2009 promised. Thirdly, South Africa’s public sector hasalready begun with an aggressive firm investment program that will counteractsome of the negative trends in the private sector. As encouraging as thesefundamental factors are, the magnitude and intensity of the prevailing riskscaused by the global financial and economic crisis are profound.
For SouthAfrica, these risks concern exports and the availability of foreign capitalaround the finance large current account deficits. The internationalization of the financialsystem has substantially changed the nature and deter- minutes the globaleconomic dynamic: the combination of deregulation of markets financial and financialinnovations – such as securitization and derivatives – free mobility of capture-andsuch flexibility and volatility of exchange rates and interest rates have onthe one hand, limited to action of domestic macroeconomic policies and on theother, was responsible for both the frequent crises balance of payments inemerging economies, as the liquidity and solvency crises, as the recentinternational financial crisis. This process of financial globalization, inwhich financial markets are integrated in such a to create a “unique”world market of money and credit, has, in turn, before a framework in whichthere are no monetary-financial rules and stabilizing foreign exchange andinstruments traditional macroeconomic policy become increasingly insufficientto contain the financial collapse and currency) worldwide, resulting ineffective demand crisis.
JM Keynes, in his General Theory of Employment,Interest and Money 1936, already called the attention to the fact that, inmonetary economies of production, the organization of financial markets CIALfaces a trade-off between liquidity and investment: on the one hand, they stimulatethe 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 betweenthe financial markets and real economy, Keynes, in Theory General, wrote that”the position is serious when enterprise becomes a bubble on thespeculation. When the development of the activities of a country becomes theby-product of activities of a casino, the job is likely to be sloppy. “Going tomeet 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 globalcasino. Speculation, in a global economy, disruptive character has not onlydomestic, but on countries as a whole, creating a sort of financial casinoexpanded. In the Keynesian perspective, financial instability is not seen as”anomaly” but as own mode of operation of financial markets in asystem in which there is no a safeguard structure that performs the role of amarket marker global (Wahlström, 2013).
Thus, the format instituted specificfinancial markets determine the possibilities of having an environment wherespeculation can flourish. Financial crises are not just results of behaviors,”irradiated “agents, but derive from the very form of operation ofglobal financial markets liberalized without an appropriate control system. These high-risk roles and remunerationcomprised the assets of many financial institutions in the United States.Liabilities values are stricter than assets. On the one hand, most part of theassets of financial institutions is quoted by the market on the other, theirliabilities are registered contracts.
Thus, assets and liabilities areunbalanced (Makhaya, & Nhundu, 2015). This is what made the capital variousinstitutions insufficient to guarantee the continuity of its operations. Thethird crisis, then, entered the economy: the equity crisis. First it was thecredit crisis, which turned into crisis that liquidity, in turn, turned intoequity crisis (Mehta, et al.
, 2012). Financial institutions were not affectedso directly by the crisis are fearful, retract their business: after all, whennegotiating an asset, the potential borrower may be a hidden or in crisis, butno outward symptoms. If this is true for the system financial, also applies tothe real sector of the economy. Who had capital investment plans productionwill keep them in the drawer. ConclusionPolicies purchase securities that are notworth what the market would pay restore the capital of institutions they couldfail. Budgetary largesse of government involving transactions of acquisitionsinstitutions within the financial system are valid.
Direct interventionsre-capitalization and takeover by the state are indispensable. However, allthese policies are limited because of the objective and subjective channels offinancial sector to the real sector contamination already so open. Anaggressive fiscal policy spending will be required. All instituted rescuepolicies can restore financial system health, but are not able to restore itsactivity (Blommestein, 2012). The sanitation system is an objective problem,accounting.
However, their activity depends of feelings, assumptions and fearsof both the financial system as part of the sector real. All the liquidity thatcan restore financial institutions and prevent the crisis reaches the system inits entirety may be repressed. Bankers and businessmen are not interested indoing heats that cannot be validated by the final consumer. The successful output should be an activelyof private business stimulated by the public sector, which should takespending, labor-hire work and transfer income to those who have a highpropensity to spend (which are the “sub-citizens) and, therefore, Theywill not impound liquidity. Should the US government policies are the financialsystem 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 theliquidity and fiscal spending policies is that the former are dependent teethreactions, sometimes overly pessimistic or cautious private sector, whilelatter represent “direct remedy in vein”, i.e. direct purchases tothe private sector, hiring hand labor or cash transfers to those who spendeverything they get and that there- to, activate the private business economy.