Critically analyse how the government debt problems initially faced by Essay - 4

Critically analyse how the government debt problems initially faced by a few relatively small economies could trigger such a wide impact in financial markets - Essay Example Though the amount of exposure of each country and each financial market to the financial market of another country varies but the fact remains that no country can be considered as isolated in respect of interconnectedness. This particular essay discusses the effect of financial crisis on two particular markets that is derivative market and foreign exchange market. The essay tries to find the possible reasons due which financial crisis started from a particular country with a small economy gradually effects the financial markets globally. In this respect of this analysis both fundamental and identifiable factors are tried to be identified. Throughout centuries there have been several financial crises that have had large scale impact on the overall financial system. Different crisis in different timers have been triggered by different factors. However although there have been various triggering factors for different crisis the impact levels of the crisis have also varied depending on their reach and spread. A few examples of such crisis in the past are Asian crisis, Japan Crisis, Crisis of the Nordic countries. However the financial crisis of the dimensions of European financial crisis is unprecedented. The massive scale of the crisis was caused by two related factors the banking crisis and the crisis of the bond market (Ullah and Ahmed, 2014). The crisis first broke in 2007 when the banks felt uncertain about their investments in certain complex financial instruments. They increased interbank lending rates and virtually stopped lending to other banks. This led to serious liquidity problems for the banks in the short r un. At that time it was felt that the problem was more specific particular institution and those particular institutions may face default risk. However after default of major banks like Lehman Brothers, and risks concerning AIG which in turn took more financial institution with them in their downward