All About Financial Crisis

Introduction

There are a large number of reasons why the economy of a certain place can not continue to be stable. This kind of situation leads to a financial crisis in that particular area. This kind of situation is mainly associated with the exchange market. When the worth of assets belonging to a country falls in the marketplace, its overall market gets unbalanced. And, this situation then exceeds the instability of the entire exchange market leading to falling in the economy and financial sector.

Financial crisis meaning

A financial crisis happens when the assets belonging to a certain country suddenly lose their worth. These types of situations lead to panic in the internal markets of the country. And for market security people start to withdraw their money from the market, which leads to a fall in the economy of a country. This condition brings a country closer to the prospect of a financial crisis. 

The financial crisis leads to a direct decrease in the paper wealth of a country. These situations can also be seen in the cases of stock market crashes, currency and banking crises, and credit defaults. These types of situations have a great impact on how money is being circulated in the marketplace. And, that can change the situation of a country for better or for worse. Also, some ways are using which these possibilities can be prevented. One of these is paying the mortgages to the people that will be sure to make better use of that mortgage. 

Financial crisis timeline

The series of events follows a well-defined chronological order to completely develop into a full-fledged financial crisis. Firstly, there is a fall in the value of the assets in the marketplace for the country. This leads to a decrease in the worth of a country in the marketplace. To maintain security, the investors of that country decide to pull their money back from the market. This leads to opening up a big hole in the market and that stabilises the market to a great extent. 

Furthermore, the role of money within the country is affected by this procedure and that leads to a decrease in its worth. And when that happens within a country, the situation of financial crisis begins. 

Types of the financial crisis

Following are the types of the financial crisis that can be based on the situations in which they are produced:

Banking crisis:

This crisis can be seen when there is a sudden rush for withdrawals in a bank. This activity renders a bank out of its deposits as all the money has already been used to fulfil the wish of individuals for cash withdrawals.  This kind of situation is produced during times of risky lending and loan defaults. 

Currency crisis:

This is the type of financial crisis that is produced when there is a fall in the rate of a currency during market exchanges. This fall in rate has to be more than 10% of the worth of currency to identify it as a financial crisis. This situation is produced when the exchange rates fall to two-thirds of their monthly average. 

Speculative crashes:

This situation is produced when a certain set of assets are overpriced than what they are worth. This leads to a drop in the market as people won’t be able to make a worthwhile trade out of those assets.  This type of crisis is the very face of the financial market of an international community.

International crisis:

There are a large number of situations that can be associated with this type of crisis. One is when a country is not able to pay back its debts, this leads to a situation of crisis for that country. Also, when the worth of a certain currency falls in the marketplace, the worth of its assets degrades. 

Conclusion

When the value of the assets of a certain country decreases, that country is not able to maintain its place in the exchange market. This situation leads to a financial crisis for that country. Similarly, outcomes can be obtained by other prospects as well. When a country goes into deep debt and is unable to pay those debts back, this situation is also observed in those cases. This situation greatly impacts the circulation of money inside a country and the other exchange markets.