Global economic crisis(2008), and i̇ts effect in Lithuania and Other Baltic countries

ARTİCLE NAME: GLOBAL CRİSİS AND ECONOMİC PROCESSES İN LİTHUANİA AND OTHER BALTİC

COUNTRİES

T.Cİstanbul Ticaret Üniversitesi

Prepared by: Khalid Mohamed MohamudLecturer: Prof.Dr.Nazim Ekren

Submitted and presented date: 13-01-2014

İNTRODUCTİON

This article deals with the main reasons of financial and economic crisis as well as

their consequences, and the links between real estate markets and

markets of securities, credit expansition and growth of investments. İt is shown

that the process in real estate bubble the burst of which was the main reason of

Global financial crisis,

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also described the main anti-measures of crisis in the EU and USA. The situation of lithuania in the context of the global crisis is discussed, also the concrete factors that have caused the economic crisis in lithuania are analysed. The means of the government’s economic policy in Lithuania and other Baltic countries are discussed in the context of the global crisis.

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The analysis of the indices of macroeconomic processes in the Baltic countries showed that economic processes were similar without essential differences in all Baltic countries. The analysis showed that economic revival of the Baltic countries will depend both on the foreign market restoration and restoration of the domestic markets and modernization of production.

Global Financial crisis and Market Economy

The onset of the financial crisis is considered to be 2007,when the Federal Reserve System had to interfere and grant liquidity to the bank system(seros,2008). The Economic cycles are an immanent feature of the market economy,because the evolution of the market economy is uneven and there is no other mechanisim to equalize dis-proportions of uneven evolution than periodical shocks-CRİSİS. Also crisis entail great loses, both Economic and Social, and they are inevitable.on the other hand the proper economic policy is ablke to reduce-the after effect of the crisis.

The main causes of the world wide financial crisis and anti-

crisis measures in the USA and EU. The current 2008, global crisis stands out from the previous

ones by it is measures, it affected majority of the world countries like Great depression(1929-1933), and both crisis arose due to some troubles in the US financial markets.

The Major features are: Vast credit expansion and financial novelty. The application of very complicated derivative financial

markets and insufficient assessment of Risk.Example(Real estate market were the detonator of the invoked world crisis of Finance and Economy, because always treated as safe investments,

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the price of which never fall down(Manson,posner2007).agreat demand of real estate raised its prices and that is turn increased investments in real estate with the expansion of real estate mortgage credits as well as houses under constructions was growing there by decreasing risk of borrowing there by banks decreased requirements of credit distribution, thus, the Credit and Real-estate market were in a full swing. And Banks grouped so called Collateralised Dept Obligations(CDO), and Sold them to various investments banks and companies,

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these later turned into securities bought into secondry dept securities and sold them into the markets of securities, due to saturated of Real estate markets it is demands began to decrease it is Prices Sank as well, and decrease of mortgage value and the amounts of Bad Credits of the banks increased which entailed liquidity problems of the banks.

Decrease of the value of mortgage, security of obligations also decreased which turns derivative financial means into worthless papers.

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The liquidity problems and the decline of value of securities led even Big banks and investment companies to bankruptcy, it means The onset of the Global crisis.

The Globalization also facilitated the expansion of the crisis, because, consequences of Globalization is The integration of Economics,Finance,culture and other sphares of the world countries, integration of financial markets is related growing Risk and uncertainity as well as increases transmission of the risks and crisis problems between global fianancial markets.

USA and other Most countries affected by the crisis showed by its indicators: long term defeciency of the current account and decreasing rates of Economic growth.

Anti-crisis both USA and EU institutions

The federal reserve Bank USA, began to decrease the basic interest rates, with the view to stop the growth of the market of interest rates, this does not help to vivify the economy(Mises2009).

Therefore the financial subsidised with the large sums to support bank liquidity.

Later the major share of state expenditure was assigned to stimulate consumers expenses and social programes.

The European commission(Commission of European committees2009), prepared restoration plan of Economics which implies: the increase of Demand by enlarging the purchasing capacity of the population and restoring the confidence of the investers.

The particular Reasons of Economic crisis in Lithuania

The main Reasons of Economic crisis in lithuania were the negative tendencies:

Real estate markets. İrresponsible economic policy of the

government. Adverse situation in the international

markets.

The economic situation of lithuania and other baltic countries before the crisis

İn 2004-2007 were the years of the fast economic growth in lithuania as well as other bhaltic countries also decreasing unemployment, increasing income, hard currency and financial support of the EU where it was the main factors of growth.

Also both enterprises and households began borrowing for consumption and business evermore, the largest share of loans received by the household aimed of the real estate markets. The bank of Lithuania volume of loans to acquire lodging has grown from 50million in 2004 to 720 million in 2007, expansion of credit had a decisive influence to form a bubble in lithuania real estate market.

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Lithuania was growing due to the growth of domestic demand, however, the import increase was not equivalent export increase and the balance of foreign trade was in a deficit up to 2009.

GDP of the Baltic states in 2005-2010 (at market prices)

GDP of the Baltic states in 2005-2010 (at market prices)

Government deficit of Lithuania and baltic states in 2005-2010 at market

prices  

Government dept of Lithuania and baltic states in 2005-2010 at market prices

Anti-crisis policy for lithuania and other baltic countries

The Lithuanian government diminished the mandatory reserve norm from6 to 4% and to increase the deposit insurance sum up to EU 100.000 with a view to vivify the domestic market using additional financial resources. Though those decisions were correct and adopted in time, unfortunately, their effect seemed to be insufficient. to maintain the market activity a more intensive promotion of economy was necessary.

Government undertook to apply the measure of restrictive fiscal policy: to decrease expenditure and increase taxes in order to stabilize state finances.

At the end of 2008, a decision was made to increase the rate of value-added tax up to 19% (later on it was increased up to 21%), income-tax, excise duty on fuel, cigarettes and alcohol, as well as to eliminate the majority of reduced tariffs of the value-added tax. The so-called ‘night’ tax reform came into effect on 7 January 2009. The tax reform was aimed more at collecting more budget revenues and stabilizing the budget deficit.

Pursue the so-called retrenchment policy to diminish government expenses by lowering the employees’ ‘and officials’ salaries, pensions, and social benefits

Evaluation and Comment

This article, the effect of 2008 world economic crisis to this small open economic country, it looks like that this country was not ready for the crisis because of the fast economic growth before the crisis, also the GDP growth before 2008 shows that there is a high increase amounting 10.3% while after crisis in 2009 experienced a slow down about 15%.

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As well as Lithuania and other Baltic countries they face problems of production decrease, emigration, unemployment, inflation, foreign investment (with the exception of Estonia), state budget deficit (for Lithuania and Latvia only).

In the case of Lithuania and policy actions for anti-crisis some of them showed lack of incompetence and responsibility from government due to the measures taken to stabilize the state finances had a negative influence on the development of the domestic markets.

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So called retrenchment policy also, it decreased income of the population and thereby consumer demand. The decrease in demand even more weakens the home market. The domestic market will revive only if income of the population starts growing and consumer demand increases.

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