How the Financial Crisis Affected the Australian Government in 2009-2015 - Case Study Example

How the Financial Crisis Affected the Australian Government in 2009-2015 Name Institutional Affiliation Introduction Australia experienced one of the greatest financial crisis in 2009 to 2015 whose root causes can be traced back in 2007. Many of the big companies operating in Australian market were forced to close down or merge with other companies to keep on operating. Though it is not clear where the crisis started, some economists suggest that the root of this crisis was the United States of America. They suggest that during the period before the crisis, people invested in purchasing high price houses including those for people who had relatively low income. Most of this property was enquired in credit that would be paid over time. Therefore, this paper explores how the criss affected various institutions across Australia. According to Berkowitz & Toay (2013), banks lowered their interest rates to encourage people take more loans. Mortgage rates were lowered too to lure customers to purchase houses. However, house prices still remained unchanged and the financial institutions made a lot of money out of the loans and mortgages. Immediately, before start of the crisis, housing companies had built a lot of houses leading to big decrease in house prices such that houses became cheaper than the remaining house mortgage debt. The possibility of selling the houses and moving was out of the question since the houses fetched little. Most people were evicted from their houses as they could not pay their loans and mortgages. Financial institutions lost a lot of money and the financial ripple moved to all other sectors causing the financial crisis. Effect of the Australia Financial Crisis Banks In Australia, the financial crisis had considerably less effects on banks in comparison to the other countries. Prior to the crisis, Australian economy had recorded a steady growth than most of the other countries making its financial system more prepared and resilient. The banks in Australia had continued to have a healthy operation and did not require capital injections from the government. However, the Australian financial markets were affected by the crisis whereby the economic growth was highly decreased but has been picking up well since then. Equity prices were another factor which was highly affected by the crisis whereby they relatively decreased in prices. This reduced the wealth of the households in Australia, but which had recovered by half its decline toward the end of the year 2009 (Berlatsky, 2010). The creditmarket was also very stable in Australia during the crisis which needed no intervention by the central bank. The health which was portrayed by the Australian banks allowed the possibility of giving out loans and maintaining the normal interest rates during the crisis. Companies During this period, companies were facing financial constraints which pushed most of the companies out of operation. This was due to the high costs involved in operation and the low returns realized during the period. Some other companies opted for mergers, whereby two companies join to minimize the operation costs and to be able to remain in operation. Companies which had specialized in exports were the most affected as most of the countries had closed down their import transactions. This automatically forced some directly affected companies out of business, necessitating their complete closure as observed by Cafruny & Schwartz (2013). Companies also encountered a credit crisis. During this period it was hard for companies to effectively obtain loans for business expansion following the high interest rates. This resulted in managerial decisions that led to cost reduction at the same level of productivity. Customers also cut down on spending. This led to reduction in the individual demand of a companies’ clientele. The reduced demand meant little cash flow which in turn meant the companies turn to lenders who had implemented strict rules for borrowing. Companies were not able to withstand such harsh economic realities (Cafruny & Schwartz, 2013) Currencies The crisis brought about gradual depreciation of the Australian dollar. Some of the factors affecting the Australian dollar were decrease in export business transactions. Export is the main income generating activity to the Australian government. An instant decrease in these exports meant there was a deficit in the government’s income channels and in order to feel the financial gap, depreciation of the country’s currency was inevitable. The Australian reserve bank had to intervene in the market and increase its liquidity to help the currency recover. It paid off toward the end of the crisis as the Australian dollar gradually recovered mirroring the strength of the economy of Australia as observed by Dolezalek (2012). Employment Farrar & Mayes (2013) finds out that during the time of the financial crisis, most of the companies faced operation hardships forcing them to merge or close down completely. This was due to low flow of cash which inhibited their operations. This led to job termination of workers at a high rate. In the sacking process, the companies which were completely closing down were forced to sack all their workers completely from the highest ranks to the subordinates. For the companies that were aiming at reducing operational costs, job termination started with the high rank people who commanded a big salary only leaving the semi-skilled and unskilled workers. All the above mentioned factors led to a high rate of unemployment which mainly affected the skilled people. However, after the financial crisis, most of the companies responded well and have been able to resume their operations. By the year 2014, as the crisis came to a close, some of the companies had already completely recovered from the crisis in terms of operations and profits. Employee cut-off had to be implemented. To reduce on costs, most business had to reduce their number of employees to save on the money spent on wages and salaries. Import Although Australia was not much affected by the financial crisis due to its stable economy, some measures had to be taken to counter the little effects brought about by the crisis. One of the measures implemented by the government was to decrease the goods which are exported and try to rely on locally produced goods. Gorton & National Bureau of Economic Research (2008) found out that export decrease was a wise decision by the government as it aimed at reducing cash flowing out of the country, which would have led to capital imbalance. The local producers of necessities were encouraged to produce more to meet the demands of the population without being supplemented by the exports. Export During the crisis, most countries had no cash flow to maintain their import partnerships with other countries. Most of the business partner countries which imported goods from Australia could not afford to maintain the business partnerships which led to cancellation of major export deals. This adversely affected the Australian export market as very little was exported (Berlatsky, 2010). The developed countries, on the other hand, highly decreased their imports only concentrating on importing the necessary goods. Australia’s main exports are wheat, wool, iron ore and energy. They mainly export to the developed first world countries and so the imports cancellation by those countries had adverse effects on the export market too. Consequently, there was a reduction in the prices of exports. Since the crisis was global, most countries cut down on expenditure, thus reducing the demand. As the demand for their exports went down, Australian exporters had to lower their prices to attract potential customers, Berlatsky (2010). Conclusion Disruption of the world financial markets had an impact on the economy of Australia and in its financial markets. As observed herein, the economy felt a great pinch in this crisis. This is due to the fact that it affected not one but a number of elements in the economy. Exports and imports that usually earn the government a great deal of income were disrupted, closure of companies meant a rise in unemployment levels in the nation, and depreciation of the currency affected trade with other nations. The recession on the world financial market created distrust among nations and inter-global banks. Financial institutions were not willing to lend each other for they feared the direction the market could take. This affected liquidity in the market as discussed above to an extent the Reserve Bank of Australia(RBA) had to inject extra cash into the economy. Financial institutions around the world were exposed to securities which affected their balance sheets. Australian institutions, on the other hand, had little exposure hence there was minimal disruption on its market. The Australian institutions, however, will continue to be affected in terms of policy making as long as other players in the global financial markets remain disrupted. The financial crisis was, thus, a hard time, not only for Australia but also the entire globe. As evidenced above, the Australian economy went through a rough patch during this period but came out strong due to their rather relatively strong economy. The individual economies of various states should thus strive to put in place mechanisms and policies that will safeguard the economy against such happenings. References Berkowitz, R., & Toay, T. N. (2013).The intellectual origins of the global financial crisis. New York: Fordham University Press Berlatsky, N. (2010). The global financial crisis. Detroit, MI: Greenhaven Press/Gale Cengage Learning Cafruny, A. W., & Schwartz, H. M. (2013).Exploring the global financial crisis. Boulder: Lynne Rienner Publishers. Dolezalek, H. (2012). The global financial crisis. Edina, Minn: ABDO Pub. Farrar, J. H., & Mayes, D. G. (2013).Globalisation, the global financial crisis and the state. Cheltenham: Edward Elgar. Gorton, G., & National Bureau of Economic Research. (2008). The Panic of 2007. Cambridge, Mass: National Bureau of Economic Research. Read More