2008 Financial crisis: What was it? Repercussions in Latvia and Latvian economy restoring.

2008 Financial crisis: What was it? Repercussions in Latvia and Latvian economy restoring.

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Part of 2007 and all 2008 in economics is best known as the Financial crisis of 2007-2008 or Global financial crisis 2008. For experts, this period is compared as strong as it was the Great Depression in the 1930s. During 2008 the world economy faced the most dangerous crisis after the one occurred in 1930. This crisis began in 2007 when the high-rise home prices in the United States collapsed and fell down dramatically, first in the American financial sector and then it affected all foreigners’ financial markets. For a better understanding of this situation, it is necessary to figure out this crisis had its origins some years ago, as all crisis do. But, when it is not possible to contain or hold on more time, when situation become unstoppable, everything collapses and all sectors notice and suffer the consequences. A summation can be found at the end of this paragraph and it was taken from the American columnist about finance, economy and business world Barry Ritholtz.  

Image courtesy of Thomas L. at Flickr.com
Image courtesy of Thomas L. at Flickr.com
  • In 1998, banks got the green light to gamble.
  • Low interest rates fueled an apparent boom.
  • Asset managers sought new ways to make money.
  • The credit rating agencies gave their blessing.
  • Fund managers did not do their homework.
  • Derivatives were unregulated.
  • The SEC loosened capital requirements.
  • The federal government overrode anti-predatory state laws.
  • Compensation schemes encouraged gambling.
  • Wall Street became “creative”
  • Private sectors lenders fed the demand.
  • Financial gadgets milked the market.
  • Commercial banks jumped in.
  • Derivatives exploded uncontrollably.
  • The boom and boost went global.
  • Fannie and Freddie jumped in the game late to protect their profits.
  • Fannie Mae and Freddie Mac market share declined.
  • It was primarily private lenders who relaxed standards.

Effects such as reduction in the services produced by labor, the U.S. unemployment increase, decline on the average hours per week work, decline in innovation, were first visible in the United States but, latter a large number of global economies were affected as well. Furthermore, The Financial Crisis Inquiry Commission argued this crisis was avoidable and cause by broad failures in financial regulation and supervision combined with excessive borrowing, lack of clarity and risky investments. This crisis in Latvia is considered as the major economic and political crisis. As in the United States, unemployment raised, the insolvency of many companies and easy credit market burst.

Latvian economy had years of success until 2008 when after the sharpest downturn in the world, the Latvian government asked the International Monetary Fund and the European Union for an emergency credit. But, as long as the government attempted to control the situation, unemployment rate growth was the highest in the European Union. Nevertheless, in 2010 there were signs of stabilization and Latvia’s debt raised from negative to stable. And finally, in 2012 the International Monetary Fund recognized Latvia’s accomplishment in bringing order to the country’s economy.

Even when Latvia’s economy seemed to downturn hopelessly, they succeed and now Latvia has become a very good example of economy’s management. Moreover, some experts consider Latvia’s procedures lessons for Greece, where a financial situation has been spotlighted for Europe and other nations. And, it was in 2010 when Latvia finally started rising from the ruins of its economic depression.

First, in the spring of 2010 in Estonia it was adopted the Euro and this was of great importance for Latvia. Why is this important for Latvia? Because this allows the European Union and the European Central Bank to expand the Economic and Monetary Union, finishing the Baltic financial crisis. Then, when the financial crisis was located in Ireland, Portugal and Spain, Latvia’s economy looked calm and well-guided.

Then, in 2010 exportations increased in Latvia and it seemed to have turned its economy around because, economic statistics were better than anticipated. As positive consequences of the faster recovery in 2010, the higher taxes revenues and the Latvian government agreed in 2011 they will not need large cuts as it was previously planned. In 2011, taxes accounted for two-thirds of the fiscal adjustment and the reduce of VAT increased from 10% to 12%, while the real estate for residential buildings was doubled.

Image courtesy of EuroCrisisExplained .co.uk at Flickr.com
Image courtesy of EuroCrisisExplained .co.uk at Flickr.com

For facing this crisis turnaround from 2008 to 2010, the economic policy was multifaceted. The concerns for restoring the financial stability was immediately and government aimed at improving economic competitiveness and efficiency of public services. But, it was the burst of exports what led the economic recovery in Latvia, even if in 2010 they did not have much to export. Certainly, thanks to measures taken on time in Latvia, this country stands out as one of the East European country with the hardest economy.

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