Student Paper: Exploring the important financial issues in the world

Content

1.0 Introduction 3

2.0 Sovereign risk and indicators 3

2.1 Definition of sovereign risk 3

2.2 Factors resulting in sovereign risks 3

2.2.1 Increasing debt level 4

2.2.2 Stress on banking system and low confidence level 5

2.2.3 Drawbacks of euro system 6

3.0 Issues on exchange rate 6

3.1 Situations on some major currencies 6

3.1.1 US dollar 6

3.1.2 Chinese RMB 7

3.1.3 Japanese Yen 8

3.1.4 Pound 8

3.2 Factors influence on exchange rate 9

3.2.1 Supply and demand factor 9

3.2.2 Inflation 11

3.2.3 Interest rates 11

3.2.4 Trade balance 12

3.3 Measures adopted by countries 12

3.3.1 Measures in the USA 12

3.3.2 Measures in Japan 13

3.3.3 Measures in China 13

3.3.4 Measures in EU 14

4.0 Renminbi internationalization 15

4.1 Definition 15

4.2 Internationalize Renminbi 16

4.2.1 Background 16

4.2.2 Measures 17

4.2.2.1 Multilateral Internationalization 18

4.2.2.2 Bilateral Internationalization 19

4.2.2.3 Enhancing the rate of using RMB as reserve currency 20

4.3 Benefits 21

4.4 Evaluation 22

5.0 The funding crisis 23

5.1 Definition 23

5.2 Causes 23

5.2.1 Funding crisis in business 23

5.2.1 Funding crisis in countries 25

5.3 Influences 29

6.0 Reference 31

Figures

Figure 1.0 The percentage of debt in the total GDP…………………………………4

Figure 2.0 Ranks of foreign exchange rate turnover…………………………………8

Figure 3.0 Demand curve and exchange rate………………………………………..10

Figure 4.0 United States GDP annual growth rate…………………………………..26

Figure 5.0 Euro area GDP annual growth rate………………………………………27

Figure 6.0 China GDP annual growth rate…………………………………………..27

Figure 7.0 Japan GDP annual growth rate…………………………………………..27

Figure 8.0 Government debts to GDP rate in major counties……………………….28

1.0 Introduction

In this paper, we will explore several important financial issues in the world including the sovereign risk, exchange rate issue, and internationalization of Chinese Renminbi as well as the possibility of funding crisis in the future, which are all based on the analysis of the actual situation of the world financial market.

2.0 Sovereign risk and indicators

2.1 Definition of sovereign risk

According to Grauwe (2011), from the late period of 2009, the sovereign risk also called debt crisis took place which have also hit almost all the European countries including Spain, Italy, Greece, Ireland, and Portugal and so on. Under the strong destroying power of the sovereign crisis, nearly all of these mentioned European countries has been hit heavily , which all struggle to pay for the bill of their debts which are accumulated for a long times sometimes even for decades.

2.2 Factors resulting in sovereign risks

2.2.1 Increasing debt level

According to the survey from Featherstone (2011), the increasing debt level is the first cause of the sovereign risk in the European countries including these countries such as Iceland, Spain, Italy, Greece, Ireland, and Portugal. And in the survey of Featherstone (2011) on these countries who possess great debts and attacked by sovereign crisis, the report from IMF can disclose some reasons for this crisis. For instance, the debt level of countries including Iceland, Spain, Italy, Greece, Ireland, and Portugal and so on may even reach a one hundred percent level in their following years, which can be got from the percentage of debt taking up in the GDP level (seeing figure 1.0).

Figure 1.0 The percentage of debt in the total GDP

figure 1.0

 

From the above figure, we can get that the debt level of the above mentioned European countries are so high some of which even higher than their GDP level such as Portugal, Italy and Greece. And although there are still some countries whose debt level is lower than their GDP level, the actual percent of the debt out of their GDP is also very high such as Spain’s 70% debt level, Germany’s 82% debt level and France 89% debt level.

2.2.2 Stress on banking system and low confidence level

Irwin (2010) pointed out as the great debt amount afforded by citizens in the mentioned European countries, the difficulty for these economic and financial organizations in these countries to generate more capital or money to support these citizens to remove some of their financial burdens. Under such kind of situation, it is very tough for these citizens in those countries to get further allowance from these financial organizations especially these banks to borrow more loans to buy proprieties such as houses. And this kind of situation has some extended side effects on other industries such as the construction industries in these European countries.

For one thing, because the financial capacity of these citizens who want to purchase houses are decreased with the high level of debt, the purchasing number of houses from the citizens will be reduced, which directly influence the incomes of these construction bosses and their workers, which further lag the development of the entire economy in these European countries. And with such kind of bad situation circulating again and again, the sovereign risk finally come into being (Irwin 2010).

2.2.3 Drawbacks of euro system

These countries which suffer the sovereign risks mostly belong to the Euro Union, which employ the same currency named euro, which produces both advantages and disadvantages for these countries. And one of the factors resulting in sovereign risks is stemmed from the euro system too. In the first place, there is no right endowed to these EU members to issue own currencies and implement these financial policies independently including fiscal policies, monetary policies and so on. In the second place, this situation makes these EU members become very passive especially when crisis occurring, such as depreciating or appreciating their currencies to reduce risks such as debt risks in this time (Wihlborg, Zhang & Willett 2010).

3.0 Issues on exchange rate

3.1 Situations on some major currencies

3.1.1 US dollar

In terms of US dollar, we may find that although the USA is experiencing a recession in some areas such as its economy increasing rate, its currency – the US dollar is still strong. At first, as the US dollar has been taking up the top position as the strongest currency in the world market, which is always the first choice for other countries to choose it as their reserve currency. Hence, such kind of great fame has assisted the United State to strengthen its finance capability to meet even great challenges such as the side influences from sovereign risks (Arezki & Candelon 2011).

At the same time, due to the side efforts of the sovereign risks on the EU members especially the euro which was depreciated by about 2.9%. Duo to the high depreciation level of the euro, these investors on euro regions have fled away to other relative safe region such as the US region, which even strengthen the US dollar further. That is why we hold the belief that the US dollar is still strong (Arezki & Candelon 2011).

3.1.2 Chinese RMB

Yu (2010) also advocate the facts that the strong position of Chinese currency. Although this currency is been appreciated passively, the bad performance of euro also make China become the other choice for investors to put their capital safely. In a sum, although the appreciation of Chinese currency is in a passive manner, the benefits is obvious than the drawbacks.

For instance, as there are massive of capital flowing into Chinese region, the financial status of RMB is strengthened, which assist its pace of internationalization as the reserve currency as the position owned by US dollar (Yu 2010).

3.1.3 Japanese Yen

In the aspect of Japanese Yen, it is believed to be still strong even there is the threat from sovereign risk from European region. At first, the accident of earthquake and tsunamis called back a great deal of oversea Japanese capital to return. This kind of situation also strengthens the financial accumulation of Japan to promote its currency to become hot. Secondly, as the Japanese Yen is seemed a little bit stronger than other currencies such as US dollar and euro, hence the position of Yen has been strengthened (Arezki & Candelon 2011).

3.1.4 Pound

As we all know that most of European countries join into the European Union, which employs the same currency (Becker & Sebastian 2009). That is to say, those countries which are in the EU are attacked by the sovereign risks a lot. Hence their united currency the euro has been influenced a lot, which position has been reduced.

While for the Great Britain, who didn’t join in the European Union survived from the sovereign risks. Its currency is still the pound, which is always the choice of countries as their foreign reserve currency. Figure 2.0 is the ranks of the weight of the most traded currency in the foreign exchange market at the year 2010 during the sovereign crisis period, from which we can find that the sterling pound is still strong, which ranks in number four.

Figure 2.0 Ranks of foreign exchange rate turnover

figure 2.0

 

3.2 Factors influence on exchange rate

3.2.1 Supply and demand factor

The first factor to influence the exchange rate is defined as supply and demand factor, which refers to the difference of the amount of available current in the global markets and the number of participants purchasing it (Morrison & Labonte 2011). For instance, if the demand for currency is high, this currency’s value will be increased, whose exchange rate will be then reduced. And then if the demand for one currency decreases, this currency’s value will drop, whose exchange rate will increase then, which is shown in figure 3.0.

Figure 3.0 Demand curve and exchange rate

figure 3.0

Moreover, there are also many factors to influence the supply and demand curve, such as the inflation situation, rate of the interest in one country, the balance of the trade and the confidence of the investors and so on. Hence if these factors change to influence the quantity of demand and supply of one country, the value of the currency will be changed, which will further influence the exchange rate of this currency (Morrison & Labonte 2011).

3.2.2 Inflation

The second factor to influence the exchange rate is named inflation, which takes place when the goods and services’ price increase. For instance, when the supply exceeds demand, the currency’s value will be decreased. And if the value of A country’s currency is lost, and at the same time the value of B country remain the same, the exchange rate of A country will decrease. (Galstyan & Lane 2009)

3.2.3 Interest rates

According to Welch and Welch (2010), interest rate refers to the amount which borrowers have to pay if they want to borrow money, which has direct influence on the inflation rate. And at the same time, if the inflation rate increases, the interest rate will increase, which may reduce the number of people who are willing to take out bank loans. Under such kind of situation, it will be much harder for these business players to raise money, which will reduce their capacity to develop their business. If this country has such kind of situation, its attractiveness to investors will be reduced to a large level. And the international trade will be slowed which further decrease the currency demand.

And meanwhile, if the interest rate decreases, the exchange rate will then go down.

3.2.4 Trade balance

Another factor to influence the exchange rate is the trade balance. Welch and Welch (2010) pointed out that the balance of the trade of one country refers to the amount of this country export and the amount of this country import. In an ideal situation, the amount of the exports for a country will equal the amount of the country imports, which is the ultimate aim of any country to pursuit. Just because many countries try their best to balance their amount of export and import, which make their currencies’ exchange rate fluctuate. For instance, if the amount of export of this country outstrips its import, the demand on its currency may be greater. At the same time, if the amount of import exceeds the export, the demand for its currency will then decrease.

That is to say, under such kind of circumstance, the exchange rate of this country will be influenced.

3.3 Measures adopted by countries

3.3.1 Measures in the USA

To speed up the recovery speed, the US government has adopted many measures to pursuit the stable and healthy performance of its exchange rate to avoid many uncertain risks. At first, some monetary policies such as pumping capital into the economy of USA to increase the dynamics level of its economy are the first choice (Crane & Currie 2011). Secondly, the federal reserve of America has also worked hard to create new dynamics for its currency (Crane & Currie 2011).

3.3.2 Measures in Japan

To maintain the stable performance of the exchange rate for Yen, the Japanese government may be going to make some interventions in the exchange market to stable the exchange rate of the Yen to produce little side effects on its export industry (Jun, H. 2011).

At the same time, we have to speak highly of the Japanese people, who are really united to support the economy stability of their country. Besides we mentioned above, many oversea capitals of these multinational Japanese own companies flowed in to their home country after the earthquake, the local banks in Japan have also contributed to great efforts to the reasonable level of Japanese Yen (Jun, H. 2011).

3.3.3 Measures in China

At first, Chinese government has implemented a series of incentives to offers many favorable policies for these enterprises to deal with their transaction if they agree to use RMB as the media in their transaction (Phillips & Talley 2010).

Secondly, China has also formalized many favorable rules and policies to employ Chinese RMB overseas to make their investment, which not only speed up the pace of internationalize the Chinese RMB but also further stable the exchange rate of its currency (Phillips & Talley 2010).

3.3.4 Measures in EU

According to the research from Peng (2011), the EU has implemented many measures to relieve problems produced by euro. At first, the stimulus package was issued by EU in 2010 which offers a large amount of capital to these EU countries to relieve the financial pressures from these member countries.

Meanwhile, some assistant bonds as well as other kinds of financial assistant measures have been introduced to the market of EU to relieve the pressures on the euro and its exchange rate. By and large, thanks to the great efforts by EU members, the exchange rate of euro has been stabilized after a period of relatively fierce change Peng (2011).

4.0 Renminbi internationalization

4.1 Definition

To internationalize a currency refers to the situation that this currency is employed and held beyond its issue country, which is on the purpose of not only transaction with people in this country but also making transaction with these non-residents of this country (Andrews 2006). That is to say, a currency which is internationalized is the one which is employed to to take the place of the national currencies of these countries which are engaged into these international transactions, which are involved in the purchase of goods, services and other kinds of financial products (Andrews 2006).

 

And meanwhile, it is also very important for us to tell the country which has a center majored in international finance from the country whose currency is an international currency (Andrews 2006). For instance, Singapore which is an important international finance center for the whole Asia or even the whole world, in which banks are located such as these foreign banks, international business takes place not only for itself but also for its customers, currency trades includes. While, as a matter of fact, Singapore can be regarded as a first class currency trading center in all the Asia around, whose turnover in foreign exchange is only outstripped by these powerful western countries such as the United Kingdom, the USA, Japan and so on. But at the same time, the currency of Singapore isn’t the international currency, which can’t be used as the US dollar to all of these countries which involved in international business as the transaction currency instead of their own currencies (Andrews 2006).

4.2 Internationalize Renminbi

4.2.1 Background

Based on the research from Wei (2011), China government has been engaged in undervaluing its currency, the Renminbi (RMB) under the assistance of artificially making RMB compared to the US dollar as a relatively low level. Under this kind of measure on RMB and other kinds of monetary as well as fiscal policies and measures such as these subsides and favorable policies on foreign trade, China has relatively successfully keep its exports in a cheap level and attract so many customers from all over the world even including customers from the USA and Europe. And at the same time, as the center of manufacturing industry in South East Asia region, in which so many exports take place. And due to the artificially undervalue its currency for a long time, China has outstrip many countries as one of the biggest export countries, which impact the export industry all around this region. And one of the successful events made by this long time devaluation of RMB is the successful attracting of many Asia countries including the developed countries and regions including Singapore, Taiwan, and Hong Kong and so on to enhance their cooperation with China as well as the competition on currency to compete their export industry.

Besides, China as well as many regional economies including the South Korea, Taiwan, Japan and so on is chasing relatively aggressively strategies to enhance their export trade, depending on the growth of export trade to enhance their economy dynamic rather than merely depending on its domestic consumption. Hence, the combination of the strategy of regional growth and these polices in China currency made the imbalance of global trade for a certain level, in which the USA and countries of EU become these countries who consume the most and countries I south east Asia export the most (Subacchi 2010).

As this kind of situation will have great influence or even side effects on the e economy and export industries of these western big countries, which makes these western counties including the USA and EU member counties to put great pressure on China to appreciate its currency. And under this kind of great pressure, China has no choice but to appreciate its currency in the end, but at the same time, it also choose to internationalize its currency to make it more active in the international stage (Subacchi 2010).

4.2.2 Measures

From the survey of Chin and Wang (2010), there are so many leaders in China and economy experts hold the attitude that one of the factors resulting in the financial crisis global was the deregulation on the international monetary system as well as the over dominant position held by the US dollar for a long time. Therefore, to further stabilize the economy environment globally, it is necessary to reform the international monetary system and reduce the dominant power of the US dollars. To achieve this goal, Chinese central government tries their best to promote the reserve currency and advance the RMB’s internalization.

4.2.2.1 Multilateral Internationalization

According to the report from Wei (2011), Chinese central government has been engaged in promoting and pushing its currency Renminbi into the umbrella of these currencies which meet the requirement of IMF’s regulation created in the 1960s on the situation that if one day the US dollar fail, these currencies are able to take the place of US dollar as the international reserve currencies to facilitate the international trade and transaction among different countries. And almost every five year, the requirements on this issue required and produced by the IMF may be revised and modified to meet the current needs of the global economy. And the next revision period or time of IMF on this issue of international currency is due in the year 2015, which pushes Chinese central government to try every means to put RMB into the umbrella or basket of this kind of currency as the international reserve.

But the requirements or criteria for a currency to become an international currency are so strict, which offers the currency of China great challenges. Till now, RMB may not meet the two requirements required by IMF on the principles to become an international currency. For one thing, RMB is still not a traded currency which is used widely for international trade globally. For the other, RMB is also not a feely usable currency, which is easy to e got in the exchange market.

To meet such kind of requirements, Chinese central government has tries best to improve its business cooperation among individual countries to enhance its bilateral deals which are involved in RMB trading.

4.2.2.2 Bilateral Internationalization

Wu (2009) pointed out the measure of bilateral internationalization employed to speed up the internationalization of RMB by Chinese government. Recently, Chinese central government has been making efforts to push the influence of RMB into a deeper and wider scale in the global markets via the allowance to establish offshore trading center in Hong Kong and other important economy centers of China mainland. New rules and regulations are carried out by the central bank of China to smoothen the road for RMB funds which are raised offshore to be taken back into the Chinese mainland so as to establish a new ecosystem of finance for RMB as its center.

At the same time, Chinese central government has also given full support to attract any currency into China with any size. This kind of policy and measure promoted by Chinese central government is carried out after the 1997’s Asia finance crisis, which is aimed to well control the exchange rate and avoid the speculation occurrence on RMB. This kind of new rule practised by Chinese central government makes the attractiveness of RMB upgrade, which widens the access for global companies to invest into the bonds market in Hong Kong which is based on RMB. Under this kind of guidance from Chinese central government, the money invested have been used to boost the economy and business in China, which further promote the internationalization pace of RMB (Wu 2009).

And then Chinese central government has further expanded the utility of its currency into other areas of finance to ensure the pace of internationalization RMB. For instance, the central government of China has offered the allowance for foreign investors, who hold RMB to enjoy direct investment right in China (Wu 2009). Although this kind of measure may not produce an immediate consequence, it is a long termed, micro-managed and intervention measures, which is a low key but relatively effective means to attract more foreign businesses and even countries to adopt RMB as their trading currency (Wu 2009).

For instance, in some Asia countries, such as Singapore, there are several banks which provide the funds and deposit services based on RMB (Wu 2009). This is the beginning of the success of Chinese government gradually to reach its aim of internationalizing its currency in the international market.

4.2.2.3 Enhancing the rate of using RMB as reserve currency

Another measure adopted by China to internationalize RMB is to allow more and more banks especially these central banks of different countries to hold Renminbi as one of their reserves. Under this efforts, more and more central banks all the world around begin to design and make up plans to purchase RMB as one of their reserves, because the good economy development speed and relatively steady performance all become the factors to push the wide usage of RMB in international business. For instance, the government of Nigeria even plans to shift about $35 billion foreign reserves which takes up more than 10% of its total reserve to Chinese Renminbi and meanwhile, this government also plans to build up the same line like Singapore has done about RMB in its banks. And the bank in Thailand, more than 7 billion RMB from it is approved by Chinese central government to be injected and invested to the interbank and the market of bond of China’s onshore regions. (Wei 2011)

Moreover, nearly 20 years ago, the central bank of China has signed an agreement of a bilateral currency swap which is worth nearly 70 billion Renminbi with the central bank of Argentine. And at the same time, several deals owning the similar meanings are made by China with banks from many countries including Russia, Brazil and so on, which also show the sincerity of China to promote the process of internationalizing its currency. (Wei 2011)

At last, in terms of transactions and trades, Chinese central government also struggles to international its currency. For instance, there are more than 7% of the external trade of China choose to use Renminbi as the transaction currency, which is under the requirements of Chinese government. (Wei 2011)

By and large, with these efforts which have been making by Chinese central government for a long time, Renminbi has already become the most welcome currency in the Asian market region to support these international trades among these Asia countries.

4.3 Benefits

As a developing country, the development of economy in China mostly depends on the capital wealth. Therefore, the internationalization of RMB may bring a lot of advantages for China. At first, internationalization RMB will support China to protect the wealth loss due to the use of foreign currency. Secondly, internationalization RMB may also support China to open up new channels for international business or trade to take place in the Chinese region. (Wei 2011)

Thirdly, internationalization RMB may also support China to improve its international status and further enhance the impact of China on the global economy. For instance, the US dollar, euro, and other currencies has enjoyed the title of international currency, hence the economy in these regions or countries get fast development speed and become the top economies in the world. (Wei 2011)

Fourthly, internationalizing RMB will support China to possess the power to impact the currency distribution and regulation in the global market and also reduce these side effects from the international monetary system and finally reduce risks from exchange rate to promote the international business and transactions for China. (Wei 2011)

4.4 Evaluation

With the above discussion, we also believe the time for Renminbi to become an international currency isn’t long. First, that the good guidance of its government as we mentioned above carried out so many effective measures to promote this issue will ease the difficulty (Subacchi 2010). Second, the economy recession in these strong western countries including the USA and EU offers China great chance to improve its economy status in the world market (Subacchi 2010).

Hence, we believe RMB will become an international currency in the future.

5.0 The funding crisis

5.1 Definition

The fund risk or crisis is defined by SYFAB (2011) as the possibility which a business or an economy may encounter in the future due to there is narrow or lacking in accesses to the finance at its affordable level ad rate.

5.2 Causes

5.2.1 Funding crisis in business

There are several reasons for a business to face the funding crisis, which we will explain in the following.

At first, it is common for a business to make up the decision to combine equity and credit financing as the means to operate its funds. While there is the cost for this kind of financing that companies have to pay for the bill of these interests needed to secure the funds outside the company. As the interest rate on these sources of funds generated by this business can only be anticipated based on the analysis of environmental situation, there are several uncertainties may produce risks for this business. Such as the changes in the credit market may influence the price to gain funds from different sources, which are the risks involved in the funding plan of the business. (SYFAB 2011)

Secondly, it is common for a business to borrow money the same as the individual does. Funds or credits borrowed by a business may be used to make payment for inventory so as to assist this business to make the payroll for its employees or be able to buy necessary equipment or facilities. And once the borrowing taking place, lenders of the money may set up a certain level of interest rate based on the amount of money lent to the business as the compensatory or return to lend money for the business. And this kind of interest paid by the business is regarded and defined as the cost involved in generating the funding for a business. (SYFAB 2011)

Thirdly there are a variety of ways for a business to operate the finance issues related to these borrowed funds. That is to say, many ways can be employed by the business to find the source of funds including borrow bank loans, open the credit lines and so on. And if the credit of the business is well build, sometimes it is possible for a business to purchase the goods first and pay them later. And moreover, it is also a good option for these public companies to issue bonds as the means to generate funding. (SYFAB 2011)

Fourthly, nearly all of the funding sources charged for the business with different rate of interest can be extended as credit. And the rate of the interest on the funding may be set up at a fixed level upon the time the deal is made or it may vary due to the changes in economy or market environment. There are some kinds of sources such as the government interests which are close related to some general standards, which may be much safer than these funding sources from individuals or private organizations. (SYFAB 2011)

Fifthly, although there are many detailed information or analysis can be carried out to assist the business to figure out some possibilities related to these risks or benefits produced by its funding related items, it is difficult for the business to get actual consequences related to the funding issues. Hence, the risks involved in the funding may take place at some uncertain situation. (SYFAB 2011)

By and large, the risks of funding may be from the bad economy situation. For example, the economy crisis during the year of 2007 and debt crisis in euro may also have bad influence on the global economy. Under this kind of situation, even the financial institution operated by government can’t be relied on, let alone these individual sources for funding. Under this kind of situation, the funding risks mat take place. And at the same time, if the sources for a business to generate funding are too narrow and few with the fixed rate of financing, the chance for this business to have funding risks may be high.

5.2.1 Funding crisis in countries

As the risks to contribute to a funding crisis in the future are high for companies or businesses, now let’s have a look at the risks for these major countries to involve in the funding crisis.

GDP performance

At first, let’s have a look at the GDP growth rate for these major countries, and the debt to the GDP level. In figure 4.0 to 7.0, we can find that the GDP annual growth rates for these major countries or areas including the USA, euro area, China and Japan mostly have negative performances. Only China has a positive increasing rate, and other countries or regions including the USA, Euro region and Japan. That is to say, the finance situation in most of these counties aren’t so satisfactory, which indicates it isn’t so easy for businesses or companies developing and operating in these regions to get expected financial support from their governments besides the funding support.

Figure 4.0 United States GDP annual growth rate

figure 4.0

 

Source: www.tradingeconomics.com

Figure 5.0 Euro area GDP annual growth rate

figure 5.0

Source: www.tradingeconomics.com

Figure 6.0 China GDP annual growth rate

figure 6.0

Source: www.tradingeconomics.com

Figure 7.0 Japan GDP annual growth rate

figure 7.0

Source: www.tradingeconomics.com

Government debt to GDP

In figure 8.0, we can find that in most countries, the government debt rates to GDP especially in these developed countries such as Japan, the USA, France, the UK, and Canada and so on. From these rates in figure 8.0, we can also find in most countries, the debts level to to their GDP is so high, which hinders the flexibility of these counties to intervene in their economies a lot. And based on these facts, we may infer that as for businesses in these countries which are planned to generate funding, one of the safest and direct ways to get funding is from bank loans. And at the same time, as most of these banks are under the macro control of the central governments of these countries, one of whose functions is to assist these countries to carry out some necessary monetary and fiscal measures to protect the healthy life circle of the economies in these countries. If the financial situations in these countries aren’t so satisfactory, how these banks can offer the expected bank loans to these businesses that need capital so badly to meet their needs of funding generation.

Figure 8.0 Government debts to GDP rate in major counties

figure 8.0

 

Source: www.tradingeconomics.com

5.3 Influences

By and large, one of the reasons for us to deduce the relatively high probability of the occurrence on funding crisis is due to these side effects produced by the financial crisis of 2007 and debt crisis in recent years, which not only make the important financial machines namely the banks for these countries are so busy to deal with these pressures produced by economy downturn but also contribute to these major countries especially these economic giants in a financial dilemma to cope with the huge amounts of debts. Under this kind of negative economy environment, it is difficult or even unable for businesses to generate necessary funding needed in their businesses from the formal means. As these formal means such as debt from banks are narrowed for these businesses, they may choose to generate money from other informal manners such as borrowing from friends, relatives or even from these loan sharks to maintain the function of their businesses. When this unhealthier circle circulates again and again the healthy economy order in funding generating will be broken, which may arouse a lot of panics and actual side effects for these businesses who can’t pay back the high interest rates caused by the loans borrowed from these loans sharks. The light influence on these businesses is to reduce their profitability level and expansion speed and the possible big influence on these businesses may lead these businesses to bankrupt.

If this happen, the funding crisis will happen, it may bring so many side effects on the whole world, not only in the economy field but also in other areas.

6.0 Reference

Andrews, D. 2006, Monetary power and monetary statecraft, International Monetary Power, Cornell University Press, London,

Arezki, R. & Candelon, B. 2011, Sovereign Rating News and Financial Markets Spillovers: Evidence from the European Debt Crisis, International Monetary Fund,

Becker & Sebastian 2009, EMU Sovereign Spread Widening, Reasonable Market Reaction or Exaggeration, Deutsche Bank Research,

Chin, G. & Wang, Y. 2010, Debating the International Currency System, China Security, Vol. 6 (1), pp. 3-20,

Crane, A. T. & Currie, A. 2011, The U.S. Dollar Is Still the Top Choice, New York Times,

Featherstone, K. 2011, The Greek sovereign debt crisis and EMU: a failing state in a skewed regime, Journal of Common Market Studies, Vol. 49, Issue 2, P.193–217,

Galstyan, V. & Lane, P. R. 2009, The composition of government spending and the real exchange rate, Journal of Money, Credit and Banking, forthcoming,

Grauwe, P. D. 2011, Only a more active ECB can solve the euro crisis, Social Science Research,

Irwin, N. 2010, Greece’s debt crisis could spread across Europe, The Washington Post,

Jun, H. 2011, Despite historic highs, yen still a safe haven, Japan Times,

Morrison, W. M. & Labonte, M. 2011, China’s Currency Policy: An Analysis of the Economic Issues, Congressional Research Service,

Peng, B. 2011,  “Comment on effective policies to deal with the debt crisis in a new phase”, China Merchants Securities, viewed 30 December 2011,
<http://59.40.185.54/qwyj/tt/201109/P020110928311887223402.pdf>

Phillips, M. M. & Talley, I. 2010, Global Leaders Welcome China’s Yuan Plan, Wall Street Journal,

Subacchi, P. 2010, One Currency, Two Systems: China’s Renminbi Strategy, Chatham House, London,

SYFAB 2011, Dealing with funding crisis and How to avoid one, SYFAB, electronic version,

Wei, L. 2011, New Move to Make Yuan a Global Currency’, Wall Street Journal,
January 12.

Welch, P. J. & Welch, G. F. 2010, Economics theory & practices, John Wiely & Sons, Inc, Hoboken,

Wihlborg, C., Zhang, N. & Willett, T. D. 2010, The Euro Debt Crisis, World Economics, Vol.11, No. 4,

Wu, F. 2009, The Renminbi challenge: The future role of Chinese currency, The International Economy, Washington D.C,

Yu, Y. D. 2010,  “From the European sovereign debt crisis to the global sovereign debt crisis, International Economic Review,

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