Financial crises are defined as an event that impacts the economic or financial state of a person, state or country. This event is relatively untimely. In other words, it takes those affected by it by surprise. Clearly, this unfavorable situation causes a considerable loss in the value of financial assets. Or in the institutions that have decisive influence, in the development of business. As well as financial activity in general. Causing a direct imbalance between the demand for means of financing made by the entities involved in the economy and the offer established by financial intermediaries.
In general, the financial crisis is associated with the difficulties caused in the banking system, in the fiduciary markets, in the willingness to pay of a country (or several), in the stock market. The markets for buying and selling shares, in public debt and more. Being present even in the small markets that are more punctual or specific. That later can cause problems in the financing mechanisms in the national economy.
The financial crisis is usually visualized in a single nation, although that does not mean that a financial crisis cannot be perceived on a continental or even global level. More if the current conditions of financial interrelation are taken into account. Thus liberation of movements in capital at the international level.
This implies that if there is a crisis in a certain nation, those closest to (or linked to the economy of the affected nation) may be involved in suffering some difficulties. As if it were an economic virus.
Origin of financial crises
As its name suggests, this type of crisis originates from the financial sector. But commonly they tend to expand, until they culminate also affecting the economic sector. Well, both have a close relationship, so it is impossible that a financial crisis does not affect the economy.
Its direct origin is generally somewhat difficult to define. Since it is uncertain in nature, however, it is usually related to the risks inherent with the unreliable performance of prices. Of liquidity, credit or exchange rates and interests.
They can be born in any market, the product of a sudden change in the prices of the products or goods that circulate. In the case of shareholder markets, the same thing happens, but with an unexpected change in the price of the shares.
However, financial crises are not born only from sudden changes in the prices of existing goods. But also in the appearance of new business opportunities. That you significantly alter the previous financial ecosystem. This generally produces an alteration in the supply and demand of the markets.
In other situations, a financial crisis can also arise when confidence in the credit system is bankrupt or altered. In such a way that any of the parties involved, estimates in a generalized way that their state is going to be harmed in the condition of financial exchange.
The effects it can cause.
It must always be borne in mind that when a financial crisis develops or arises, the effects it can cause are very varied. Of varying magnitude, isolated from the financial sector or, failing that, extended to the economic sector (as discussed above). However, whatever the circumstance, it comes with a risk. Or rather, a very probable increase of the same of course, the uncertainty of the increase in price or rationing of credit.
If one takes into account that external financing is basically essential for all those involved in capitalist economic operations. In these situations it is impossible that consequences are not derived for what is known as “General economic activity”. And depending on how big the financial misalignment is causing the crisis, it can be strong enough to produce an economic recession. And if we are not careful enough, we will end up in a depression that lies in the paralysis of the rhythm of economic activity.
Examples of negative effects caused by financial crises we can find many throughout our history, the closest being the one that is being suffered with the civil 19 pandemic (or corona virus). This is how we conclude with the writing of the article on financial crisis.
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