terized by prolonged periods of increased unemployment and inflation, reduced international trade and investment, a loss of foreign reserves and recession. Various types of crises can arise in the global economy. An example of the crises is the financial crisis that is usually observed globally.
A Financial crisis according to Portes (1998) is a situation where the financial markets are disturbed in such a manner that the markets fail to allocate the capital. As a result, the investment and the financial intermediation are gravely affected. A ‘financial crisis is’ a term that is usually broadly used for many types of crises. According to Portes (1998) a financial crisis is used to refer to exchange rate problems, bankruptcy, and debt defaults. Some of the examples of the financial crises are explained below.
According to Jahjah (2000), defaults refer to a situation where any individual or a country fails to comply with the terms and conditions of an agreement and also is not able to pay the required debts at the already proposed time. An example of a default crisis would be the sub prime crisis that occurred in the US in 2008 where the borrowers were provided with the loans that could not be sold in the prime market according to Whalen (2008).
The term ‘sub prime’ was used for the ‘sub prime’ crisis because it actually defines the status of the borrower. This means that during the crises that borrowers who had poor credit history were granted loans. As mentioned above, these loans could not be sold out to anyone in the prime markets. There was a sub prime crisis because the borrowers and lenders both were at risk. The reasons were that the sub prime lending according to Whalen (2008) meant that the borrowers and the lenders had to face markets with higher interest rates, a high rate of default and poor credit history.
In the US according to Shankar (2008), the sub prime lending increased from 9% in 1996 to 21% in 2004. Some analysts argue that the ...
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