The world financial crisis, which commenced a year ago, continues to collect new speeds and has already reached a new stage. Last week the stock trades in many countries were closed with significant reduction in the leading indices to the minimum level over the past three years. Significant reduction was noted in the shares of banking sector, which incurred basic impact of world credit and financial crisis.
Writing-off and losses of the world banking sector as a result of the mortgage crisis in the USA, which affected the international financial system, already exceeded $700bln. The crisis radically re-shaped the financial landscape, leading to the breakdown of the leading American banks. Since the beginning of the year, twelve banks have already become bankrupt in the USA and this tendency continues.
Firstly, Bear Stearns, the fifth largest investment bank of the USA, ended existence - it was purchased by J.P.Morgan Chase, the large financial companies Bank of America and Merrill Lynch agreed upon confluence. But after bankruptcy of the American investment bank Lehman Brothers, the fourth largest bank in the USA, at all exchanges of the world, a drop is observed in the stock prices, which is the largest bankruptcy in the corporate history of the USA.
The financiers attempt to quiet the fears of small shareholders, but no-one can predict further movement of the events. The former head of American Federal Reserve Alan Grispan is disposed extremely pessimistically.
The cost of securities of AIG - the largest insurance company of the USA, to which the largest banks of the world "were tied up", which declared the plans to attract additional capital, collapsed by 46%, Washington Mutual - 23%. The shares of Bank of America, which agreed to purchase Merrill Lynch for $50bln, fell in the price by 16%. At the same time, the securities of Merrill rose in price by 22%.
The financial crisis, which began from the bankruptcy of the mortgage market last year, is the event, which occurs "once per hundred years" and this crisis will lead to the collapse of the more significant number of companies, experts said.
The wave of the American crisis affected the entire world. The crisis of the American mortgage rapidly affects the financial systems of North America and Western Europe and also Asian banks.
The crisis took the shape of a crisis of liquidity in the international capital markets, having a negative effect on the economic situation in many developed countries of Europe. The amounts of the ransom of the mortgages in banks substantially reduced, some re-finance organizations froze their operations, a number of banks considerably reduced the credits, in this case the rates on them began to rise.
Rates of stocks dropped in all European banks - Portuguese Banco BPI (down 19.2%), Greek EFG Eurobank (down 18.4%), Austrian Erste Bank (down 17.9%). Austrian Erste Bank, possessing subsidiaries in almost all Eastern European countries, is Austria's leading bank. Erst Bank serves 17mln clients and is the largest bank in the country in terms of balance sum - it exceeds €160bln. In previous years, the bank demonstrated excellent growth indices. In 2006, bank's proceeds rose by 20.1% from the previous year. Thus, it is not the consequences of rash speculations of EU suburban countries' small banks, but a very serious crisis affecting the leading credit institutions of the old Europe.
The German banking system has also displayed rather depressing indices. The Munich-based Hypo Real Estate group, one of world's leaders on financing of real estate purchase projects, has announced its losses as €400mln. That decreased its motion vector by 35% per a single day.
Bradford & Bingley, experiencing financial problems, is the second mortgage bank in UK, following Northern Rock, to be nationalized as a result of the mass panic of investors. The Ministry of Finance and the Financial Service Administration, the key regulator of the banking sector in the UK, are already negotiating with Bradford & Bingley management so as to rescue the bank. After nationalization of the bank, Ministry of Finance intends to sell Bradford & Bingley, completely or partially, to another bank or several banks.
Dexia bank, with about 5mln of clients, has become the second bank in Belgium which failed to preserve its independence on the background of growing world financial crisis. Belgium, the Netherlands and Luxemburg were announced to partially nationalize Fortis bank through assisting the bank with €11.2bln in exchange for 49% of its stocks.
In Europe, 56 banks have applied to the European Central Bank (ECB) to issue liquidities in a total sum of €102bln. Finally, ECB carried out an unprecedented refinancing of European zone's stock market - €70bln. Earlier, the Frankfurt establishment had allocated 35bln to European zone's countries experiencing difficulties.
Fortunately, Azerbaijani banks did not enter the list. The National Bank of Azerbaijan (NBA) called on the banks to pursue careful policy, taking into account all elements of the market situation. NBA urged the banks to create an institutional platform until assets and operations rise. At the moment, Azerbaijani banks run average AZN 150-200mln of assets. Correspondingly, NBA believes their risk management, capital adequacy and corporate governance system must meet the best standards. On the other hand, the closeness of Azerbaijan's banking market turned to be in country's favour.
Anyway, local banks cannot lend consumer or entrepreneurship credits at the moment and are likely to face problems with returning of funds borrowed from foreign capital markets. At the same time, these restrictions in the banking sector of the country may be called the bank's defence reaction to outside threats.
Observers are sure that the bankruptcy list will be enlarged and suggest that hundreds or even thousands of financial companies be shut down. Former head of the US Federal Reserve System Alan Greenspan called the developing financial crisis as the most hardest in the run since the World War II.
It is too difficult to forecast what will be the consequences of the current crisis for the United States. However, the history has a plenty of examples when a great international empire, uniting a part of the world through a language, ideology, religion, economy and government model, collapsed due to complexity of its own system.
Having spread its industrial potential worldwide, the United States has preserved the control over money flows, which feed the country's budget and make the country an elastic market of industrial goods.
Here is the danger for the United States and all countries which economies are tightly connected with that of the United States. The world has been many times warned that the financial bubble will soon burst. But it was so profitably to make money from money that the capitals saved in the 'bubble' have many times exceeded those rotating in the real economy.
Whilst the United States is using the resources from the entire world, its economy provides high consumption standard to Americans. But the system will fail as soon as the resource flows have been cut or have weakened by any of several reasons.
Only qualitative reformation may prevent the system from fall.