Issue
According to financial experts and economists, global effects of the debt crisis are likely to excavate if the situation continues. They say the economic recession will be worsening unless the situation is taken serious and measures put in place to avoid this. Although there are many vigilantly optimistic analysts today, there are still fears that global economic might soon collapse.
Background/Situation Analysis
Today, many countries in the world are faced with the debt crisis that hastened from the credit collapse of 2008.
Despite the fact that the governments did not initiate the global debt crisis, in many countries it has been blamed for excessive spending.
Economic Analysis
Even though, economists feel that only the current situation of global debt crisis is only temporary, the worst still expected to come.
According to financial expert the expected duration for global debt in several countries is expected to last for a while depending on given counties. For instance, in Eurozone’s, the crisis would last two quarters. In USA, the situation is likely to last for three quarters, while, in United Kingdom, the duration is likely to be four quarters.
Risks
The global economy is likely to slow this year
Mild recession is likely to be experienced in counties such as Europe this year
The world recovery, which is weak, is in danger of stalling.
Impact and consequences
In forecasts for growth, economist has warned if countries do not take stronger actions that will stem debt crisis; the situation is likely to take a downturn and worse.
Euro-zone leaders need to rise the state of cost borrowing and squeeze on credit banking, failure to which the outcome will be far worse.
If global debt crisis intensifies further, here is an even greater danger; the world will be plunged in another recession just like 2008.
Some developing countries that have continued to enjoy strong economic growth are likely to experience significant slowdowns as a result of global effects of the debt crisis. This situation will be a replicate of 2008 situation that saw many developing countries witness significant slowdowns after a strong economic growth. For instance, Cambodia fall from 10% in 2007 to zero in 2009, while Kenya achieved only 4% growth in 2009 after experiencing 7% in 2007.
Global debt crisis will also cause drops in investments, trade, transfers sent from migrant workers, and commodity prices.
Option Analysis
Countries need to be engaged actively in understanding the causes, significances, and best resolution policies of financial crises. This will help them to deal with the crisis well in case it happens.
The governments need to come up with more subtle ways that will help it reduce its debt burden.
Financial repression techniques need to be put in place to ensure that interest rates are kept low. This, in turn, will help settle the real value of government debt and reduce debt servicing costs. In addition, other techniques such as directed lending to government can be put in place to certify tight relationship between government and banks.
Assessment of the Proposal
Strengths
Implementation of pro-growth policies and integration of monetary union will boost the size of many countries debt-crisis firewall.
If governments follow the IMF recommendation keenly, they will be able to counter the global crisis impacts effectively
Countries need to avoid responding to any unanticipated downturn in growth. This can be achieved by tightening policies further.
Advanced economies such as UK, U.S., euro zone, and Japan are expected to expand by 1.5% through 2013.
If the people jointly own banks, this will ensure that profits and interest go back to the people and the government. People will, therefore, benefit from increased public services, decreased taxes, and cheaper public infrastructure.
Weaknesses
Developing countries growth has slowed while the European banks have been forced to spend less in demand contracts.
The IMF predicts that some countries will expand by 5.4% this year but drop to 5.2% next year, shearing half a percentage point from their growth estimates.
Growth in developing economies has forced European banks to spend less in their demand contracts.
Personal Recommendations
I would urge both industrialized and developing countries to boost their funds by lending resources. They can then use bailouts funds to help boost banks cash levels and keep financing costs down.
Government needs to encourage bond-buying programs. This is because this will help ease policy interest rates and also maintain ample credit in the financial system.
References
Long-term interest rate statistics for EU Member States". ECB. (2011). Retrieved 9 Nov 2012.
Wearden, Graeme. (2011). "EU debt crisis: Italy hit with rating downgrade". The Guardian (UK). Retrieved 09 Nov 2012.
Haidar, Jamal Ibrahim. (2012). "Sovereign Credit Risk in the Eurozone," World Economics, World Economics, vol. 13(1), pages 123-136, March
Koba, Mark. (2012). "CNBC-Europe's Economic Crisis-What You Need to Know-Mark Thoma-June 13, 2012". Finance.yahoo.com. Retrieved 2012-11-09.
James Wilson (June 25, 2012). "Cyprus requests eurozone bailout". The Financial Times. Retrieved Nov 09, 2012.
