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1. Euro crisis as a funding crisis
The 2007 financial crisis was a banking crisis, the current Euro crisis is a Sovereign debt crisis and most analysts believe that the financial world will face a new crisis namely a funding crisis. (20 marks) (Approx. 1,500 words)
1.1 Why is there an expectation of a funding crisis?
1.1.1 Large economic stimulus packages during and after the 2007 financial crisis
The collapse of Lehman Brothers on September 14, 2008 marked the beginning of a new phase in the global financial crisis. Governments around the world struggled to rescue giant financial institutions as the fallout from the housing and stock market collapse worsened. In January of 2009 US President Obama proposed federal spending of around $1 trillion in an attempt to improve the state of the financial crisis. In Australia, with the economy facing a recession, an economic stimulus package worth $10.4 billion was announced in October 2008 (canstar.com.au 2012). And in case of China, with the happening of the crisis the government promised it would loosen credit conditions, cut taxes and embark on a massive infrastructure spending program in a wide-ranging effort to offset adverse global economic conditions by boosting domestic demand. A stimulus package estimated at 4 trillion yuan (about 570 billion U.S. dollars) had been spent over the later two years to finance programs in 10 major areas, such as low-income housing, rural infrastructure, water, electricity, transportation, the environment, technological innovation and rebuilding from several disasters, most notably the May 12 earthquake (xinhuanet.com 2008). There are two major reasons here behind the large economic stimulus packages adopted by various governments to offset the negative effects of the global financial crisis as contributors to the funding issues: on one hand, since most of these so called stimulus packages are designed and distributed and implemented by the government forces and central banks rather than the market entities, and the government tend to bail out the large multinational companies because their failing would affect the market confidences but such targeting stimulus government spending packages would result in the short of funding in areas where policy had not taken into consideration. On the other hand, the fact that government’s money does not come out of nowhere, large government deficit could take years for governments to recover to the normal balance of payment. The large government deficit also result in the controlled government spending in the later years which result in the debt crisis and the later funding crisis as governments become more conservative in spending its money.
1.1.2 Liquidity scarcity in the market
When the economic crisis happened, the prospect coming economic performance and growth was under scrutiny and suspects in the market, investors tend to seek safer place for their fortune, therefore money flew out of high risks financial markets such as the stock market, fortune evaporated without leaving anything in a short period of time but stock market happen to be one of the major source of cash capital, with the loss of the investor confidence it is inevitable that there will be a liquidity scarcity or even a crisis happening in the market.
1.1.3 Stringent banking loan policy
With the unfolding of both the financial crisis and sovereign debt crisis, even banks could be facing liquidity issues, therefore, many banks exert stricter limits over the lending out of money in term of loan to the business firms and also the doom market prospect also impacted the banks’ confidence over the companies’ long term profitability and long term based liquidity to clear the maturing obligations. And when two major capital sources, i.e. bank loans and stock market become unavailable to companies in particular small and medium sized companies, the funding crisis would occur.
1.2 What would be the effects on corporations need for funds if a crisis materializes?
1.2.1 Decrease of credit sale
The term credit sale refers to the sales transaction by which the buyer is allowed to take immediate possession of the purchased goods and pay for them at a later date (qfinance.com 2011). Usually as we can see from the financial reports issued by the large listed companies, credit sale in many industries are common and acceptable. But if funding become a serious problem, and cash flow could not be easily maintained, credit sale could be fatal to these companies. And thus the funding crisis could reduce the possibility of issue of credit sale. This change would in the end affect the total sale of the companies.
1.2.2 Limited funding for R&D efforts
The term R&D or Research and Development refers to a specific group of activities within a business (Lientz & Rea 2000). The activities that are classified as R&D differ from company to company, but there is some similarities. One of the major key features of R&D efforts is that though these activities are developed to bring into profits to the companies and business, since the existence of the production cycles and also other factors, it takes time for the R&D fruits to be implemented into business and yield sale revenue. Therefore, if company funding become difficult, such R&D efforts which take time to contribute of cash growth could be suspended if they do not have a better choice.
1.2.3 Limited funding for new product development
The product life cycle is marketing concept that describes the way the revenues from the sale of a product behave over time. Typically the product life cycle is drawn as a bell curve, shown below, with the life cycle being divided into four stages: introduction, growth, maturity and decline (billyfire.com 2008). As we can see from the below figure, in the introduction and growth stage, revenue is still small in volume in particular in the introduction stage. And usually in these stage, new product are developed and release into the market to test the market response.
Figure 1 The product lifecycle
Source: billyfire.com 2008
But as known to us who are armed with basic marketing knowledge, there could be so called start-up loss because companies need to spend money in the development of the new products and promotion of the products in the market. But with the happening of the so called funding crisis, the companies with tight funding may not be able to pay the start-up loss even though the profit making could be following.
1.2.4 Adjustments in the human resource management
With limited funding, companies tend to adopt techniques to save up costs, and some of them could be in the field of human resource management. First of all, companies in face of dooming future market usually could stop or change the recruitment plan to stop the headcount from growing further; secondly, while stopping the new recruitment could not save up sufficient cost, companies also would approach to fire the current employees in particular when there is a redundancy; thirdly, some companies would also make use of the opportunity to change its structure such as changing from complex hierarchy to flat structure which would need fewer staffs.
1.2.5 Changing marketing strategy with changing customer behaviors
Since the funding crisis tend to come with difficult economic situations such as the above mentioned sovereignty crisis, customer behaviors tend to be different than in other economic situations because consumers are more conservative and price sensitive, and therefore, companies also need to apply particular marketing strategies to adapt with the changing customer psychology and behaviors. And in particular, companies suffering from funding crisis would need to tailor its marketing strategy not only to deal with changed customer demand but also its difficult and reduced marketing budget.
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