3 Monetary Crises within the twenty first Century

The 21st century has proven to be as economically tumultuous as the preceding two centuries. This period has seen multiple financial crises striking nations, regions, and—in the case of the Great Recession—the entire global economy. All financial crises share certain characteristics, but each tells its own unique story with its own lessons for the future. Read on to learn more about the three most notable financial crises the world experienced in the 21st century.

Key Takeaways

  • Financial crises and fiscal crises have differences and similarities.
  • There have been at least three notable financial crises in the 21st century.
  • Argentina experienced a financial crisis between 2001 and 2002, which led the country’s government to lose access to capital markets.
  • The 2007–2009 global financial crisis is considered the worst global economic crisis since the Great Depression.
  • Falling commodity prices and the annexation of Crimea and Ukraine led to the collapse of Russia’s economy.

2001–2002 Argentine Economic Crisis

Argentine crises have been a familiar feature since the great financial panic of 1876. The country experienced its first crisis of the 21st century from 2001–2002, which involved the combination of a currency crisis and a financial panic. An unsuccessful hard currency peg to the U.S. dollar left the Argentine peso in disarray. Bank depositors panicked when the Argentine government flirted with a deposit freeze, causing interest rates to spike sharply.

On Dec. 1, 2001, Minister of Economy Domingo Cavallo enacted a freeze on bank deposits. Families were locked away from their savings, and inflation rates hit an astronomical 5,000%. Within the week, the International Monetary Fund (IMF) announced it would no longer offer support to Argentina as the country was deemed a serial defaulter. International authorities didn’t believe proper reforms would actually take place.

Financial Crisis

The Argentine government lost access to the capital markets, and private Argentine financial institutions were also cut off. Many businesses closed. Some foreign banks—which were a significant presence—pulled out rather than risk their assets. Interest rates’ erratic and extreme nature made it virtually impossible for any financial firm to function properly.

The Argentine banking sector was lauded for its progressive regulations in the late 1990s, but that didn’t stop the carnage of the 2001–2002 crash. By 2002, the default rate among bond issuers was nearly 60%. Local debtors didn’t fare any better, and their subsequent nonpayments crushed commercial lenders.

The government of Argentina didn’t fare much better. With the economy in a downward spiral, high unemployment, and no access to credit markets, the Argentine government defaulted on $100 billion worth of its debt. In other words, the government walked away from investors that bought Argentine government bonds.

Currency Crisis

With the economy struggling and uncertainty surrounding the stability of the federal government, investment capital fled the country. The result was a devaluation or depreciation of the Argentine peso as investors sold their peso-denominated investments for foreign holdings.

It’s common for emerging market economies to denominate their debt in U.S. dollars, and during a devaluation, it can cripple a country. Any debt that was denominated in dollars for the government, companies, and individuals increased significantly nearly overnight since taxes and revenue were earned in pesos.

In other words, far more pesos were needed to pay off the same principal balance owed for the dollar-denominated loans due solely to the peso exchange rate devaluation against the dollar.

2007–2009 Global Financial Crisis

Widely considered the worst global economic crisis since the Great Depression, the global financial crisis in 2007-2009 ignited in the U.S. and spread across most of the developed world. Plenty has been written about the nature and causes of the Great Recession, but the essential story centers around major investment banks that overleveraged themselves using mortgage-backed securities (MBSs).

The returns and prices of the banks’ MBS instruments were predicated on rising home prices caused by an unsustainable asset bubble in the U.S. housing market. Falling housing prices created a chain reaction of defaults by bond issuers across the country, starting in subprime mortgages and eventually spreading throughout the entire MBS market.

Unfortunately for international investment banks, the entire global financial system became increasingly interconnected in the 1990s and early 2000s. Junk securities backed by adjustable-rate mortgages (ARMs)—many of which inexplicably received AAA ratings from Moody’s and Standard & Poor’s—permeated Japanese and European investor portfolios.

The early stages of the crisis began in the second half of 2007, eventually peaking in September 2008. Several global investment banks were compromised, including Lehman Brothers, AIG, Bear Stearns, Countrywide Financial, Wachovia, and Washington Mutual.

There were numerous bank failures in Europe as well, including the Royal Bank of Scotland, which posted a $34 billion loss in 2008. RBS was one of the banks the British government had to bail out with its $63 billion rescue package. The worst of the U.S. recession occurred in late 2008 and early 2009, but it took a few months for panic to hit Europe. Countries such as Greece, Ireland, and Portugal were hit hardest.

However, the impact of the financial crisis wasn’t limited to the U.S. and Europe. Global gross domestic product (GDP), which measures the total output of goods and services for all countries, declined in 2009 to -1.67% from 1.85% in 2008, according to the World Bank.

2014 Russian Financial Crisis

The Vladimir Putin-led Russian economy grew appreciably in the first half of the 21st century, thanks in large part to the thriving energy sector and rising global commodity prices. The Russian economy became so dependent on energy exports that nearly half of the Russian government’s revenues were generated by the sale of oil and natural gas.

But global oil prices took a nosedive in June 2014. The average price for a barrel of oil dropped nearly 40% in six months from the previous $100 threshold. The dip below $100 was noteworthy since that was the number that Russian officials estimated was necessary to keep a balanced budget.

Oil prices are a financial concern for most countries because it is a resource the world depends on. But oil prices alone usually don’t lead to crises unless there are other external factors triggering losses.

Putin exacerbated the energy problem by invading and annexing Crimea from Ukraine, resulting in economic sanctions from the U.S. and Europe. Major financial institutions, such as Goldman Sachs, began to cut off capital and cash to Russia. The Russian government responded with aggressive monetary expansion, leading to high inflation and crippling losses among Russian banks.

As a result, economic sanctions were imposed by the U.S., Europe, and other countries, including a ban on buying western technology to develop oil. Other sanctions included blocking Russian banks from obtaining capital from Europe or the U.S.

The impact of the crisis and the sanctions on the Russian economy was significant. In 2015 the GDP declined by -1.97% from the year earlier. It wasn’t until 2017 before the Russian economy posted an annual growth rate of over 1.5%, according to the World Bank.

Financial vs. Fiscal Crises

Financial and fiscal crises can occur for several reasons and be caused by both internal and external factors. A crisis could emanate from within a nation’s financial system or federal government.

Conversely, an exogenous event, such as a natural disaster or global recession, could send a country into a financial and fiscal crisis. Although they may occur simultaneously, there are distinct differences between a financial and fiscal crisis.

Financial Crisis

A financial crisis is a generalized term for systemic problems in the larger financial sector of a country or countries. Financial crises often, but not always, lead to recessions. If the U.S. banking sector collectively makes poor lending decisions, or if it is improperly regulated or taxed, or if it experiences some other exogenous shock that causes industry-wide losses and loss of share prices, that’s a financial crisis.

Of all the sectors in an economy, the financial sector is considered to be the most dangerous epicenter of a crisis since every other sector relies on it for monetary and structural support.

Fiscal Crisis

A fiscal crisis, on the other hand, refers to a problem with government balance sheets. If a government’s debt load creates funding or performance issues, it may be said to experience a fiscal crisis. A fiscal crisis could occur in the United States if, for example, the federal government borrowed too much money and found itself shut out of the credit markets. A fiscal crisis could also occur if a major credit rating agency downgraded U.S. Treasuries, or if the federal government needed to suspend payments due to a budget shortfall.

A fiscal crisis can also occur following recessions and periods of high unemployment, which usually results in less tax revenue being collected, creating a revenue shortfall for the government. Excessive borrowing or debt during wartime can also push a nation into a fiscal crisis if the country can’t repay the debt due to damage to the country’s economy and infrastructure.

Financial and fiscal crises may occur independently or concurrently. It is possible for a government’s fiscal crisis to bring about a financial crisis either directly or indirectly, particularly if the government responds improperly to its budget problems by confiscating savings, raiding capital markets, or destroying the value of the local currency. For example, the sovereign debt crisis that gripped much of southern Europe in 2010 was a fiscal crisis, but it wasn’t a financial crisis.

What are the Financial Crises of the 20th and 21st Centuries?

The two centuries’ most significant and impactful financial crises are the Great Depression, The Dotcom Bubble, and The Great Recession.

What Causes a Financial Crisis?

Financial crises are caused by the failure of one or more systems. Usually, one system that other systems depend on fails, which causes the dependent systems to fail. This chain of events can continue if too many systems are dependent on one another.

What Are the Stages of a Financial Crisis?

There are usually several stages to a financial crisis. The first stage is typically an event that causes a single system failure because of a lack of regulatory oversight or governance failures, one person or organization taking advantage of the system for their own gain, or speculation and greed on a large scale. The second stage is where systems that depended on the original system begin to feel the effects and start to fail. Third, because of the failures, organizations involved in the systems fail to meet their financial obligations, assets lose significant amounts of value, and widespread debt increases significantly. Fourth, the crisis either evolves and adversely affects an economy, it is absorbed by a strong economy, or a government steps in to bail out the affected parties.

The Bottom Line

A financial crisis is a failure of several financial systems, causing losses on a large scale. It is difficult to avoid financial crises because certain types of people will always try to find a way to make more money. Institutional investors, retail investors, and businesses will always flock to apparently invincible investments, regulations will be circumvented, and so on—there will always be another financial crisis because money always gets tied up into investments that appear too good to be true.

Because financial systems have traditionally been tied together, one event outside of anyone’s control that a system depends on usually triggers an implosion because it wasn’t anticipated or the risks were ignored.

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