The last month or so has been a tumultuous ride for the global banking sector, with US' Silicon Valley Bank and Switzerland's Credit Suisse amongst the big guns to collapse.
Amid the already persistent recession fears, volatile markets, rising unemployment rates and inflation, these back-to-back banking sector collapses have refreshed the devastating memories of past financial crises. Even if you haven't witnessed them, you must have at least heard or read about them.
If not, then let us take a deep dive and list ten of the biggest financial crises in history, which rattled the economic stability of many nations during different phases in history.
So here is a rundown of some of the biggest financial crises to ever happen in the world:
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Biggest Financial Crises
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1. The Credit Crisis of 1772
This devastating crisis is one of the world's earliest ones to take place. It originated in London and was quick to spread to the rest of Europe.
In the mid-1760s the British Empire had accumulated an enormous amount of wealth through its colonial possessions and trade. This created an aura of over-optimism and a period of rapid credit expansion by many British banks, as per a Britannica report. The hype came to an abrupt ending on June 8, 1772, when Alexander Fordyce, who was one of the partners of the British banking house Neal, James, Fordyce, and Down—fled to France to escape his debt repayments.
The news quickly spread and triggered a banking panic in England, as creditors began to form long lines in front of British banks to demand instant cash withdrawals. The crisis didn't stop there, and rapidly spread to Scotland, the Netherlands, other parts of Europe, and the British American colonies. Historians have reportedly claimed that the economic repercussions of this crisis were one of the major contributing factors to the Boston Tea Party protests and the American Revolution.
2. The Junk Bond Crash Of 1980s
After nearly a decade of supercharged growth in the 1970s, the junk bond market slumped in the late 1980s following a series of interest rate hikes by the central bank of the U.S., the Federal Reserve. For the uninitiated, ajunk bondis a high-yielding fixed-income security with a high risk of default on payment, it usually carries a higher risk of default than most other bonds.
American financierMichael Milken had helped popularise the financial instrument, with many using it as a way of funding leveraged buyouts. However, supply eventually outpaced demand, and the market tanked. Milken was charged with securities and reporting violations and paid a mammoth $200 million fine and served a 22-month jail sentence.
3. The Mexican Peso Crisis Of 1994
This is another crisis that not many are aware of. In a surprise move in December 1994, Mexico devalued its own currency, the peso, after the country's current account deficit grew and its international reserves declined, as per Reuters. The country, however, eventually ended up getting external financial support from the International Monetary Fund (IMF) and a $50 billion bailout from the United States.
4. The Asian Currency Crisis Of 1997
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A massive outflow of capital from Asian economies in the mid-to-late 1990s put pressure on the currencies in the region, necessitating government support.
That crisis kicked off in Thailand in 1997when authorities had to devalue the Thai baht after months of trying to defend the currency's peg to the dollar and drained its forex reserves. The crisis soon spread to other markets in Asia, including Indonesia, South Korea and Malaysia. As per a Reuters report,global bodies, including the IMF and the World Bank, had to step in with rescue packages amounting to more than $100 billion for the economies.
5. The Great Depression Of 1929–39
This was undoubtedly the worst financial and economic crisis of the 20th century. It's widely believed that the Great Depression was triggered by the Wall Street crash of 1929 and later deepened by the poor policy decisions of the U.S. government. The Great Depression lasted for almost 10 years, i.e. a decade, and resulted in massive loss of income, record unemployment rates, and output loss, especially in industrialized nations. In the United States, the unemployment rate hit almost 25% at the peak of the crisis in 1933, as per Britannica report.
For the unversed, 1929's wall street crash happenedover the course of four business days, i.e. from Black Thursday (October 24th 1929) through Black Tuesday (October 29th 1929), the Dow Jones Industrial Average, which is a price-weighted measurement stock market index of 30 prominent companies listed on US stock exchanges in the United States, dropped massively, from 305.85 points to 230.07 points, representing a downfall of 25% in stock prices.
Before the market crash, which eventually wiped out both corporate and individual wealth, the stock market had peaked on Sept. 3, 1929, with the Dow reaching the 381.17 mark. But ultimately during the crash, Dow reached its bottom on July 8, 1932, reaching the 41.22 mark, signalling a staggering loss of 89.2%.
Also Read:How The StockMarket CrashOf 1929 Led To World War II
6. The Suez Crisis Of 1956
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About seven decades ago, on July 26, 1956, Egypt nationalized the Suez Canal Company. Post this decision, France, Israel and the United Kingdom initiated joint military action, with Israel invading the Sinai on October 29, 1956. This military action lasted two months and amid the turmoil and uncertainty, a financial crisis erupted.
All four countries were soon seeking IMF financial assistance. And that's not all. Political consequences were present too: Egypt’s independence, Israel’s survival as a Nation, and a devastating blow to Britain’s Victorian aspirations. The Suez Canal was closed for 6 months resulting in trade diversion, cost increases and delivery delays impacting the current account balances of all 4 countries.
Then in September - October 1956, Egypt, Israel and France approached the IMF with financing requests, to overcome temporary balance of payments problems arising from the current account. • In 1956, Britain had a significant current account surplus. The pound sterling came under heavy speculative pressure and the United Kingdom witnessed short-term capital outflows, as per a National Archives of India report.
The United Kingdom did not qualify for financial assistance from the IMF. The Bank of England had enough resources to credit and fend off the outflow without IMF assistance. That said, the IMF financed all 4 countries with on a standby basis. This involvement gave IMF the role of an International Crisis Manager. The Suez Crisis was the first major financial crisis of the post-war era.
By September 1956, France witnessed a situation of low and depleting foreign exchange reserves. The French Franc was subjected to a flight of capital. France sought a financing arrangement for 50 percent of its quota of US $ 263.5 million. France’s current account position deteriorated by US$ 1.1 billion in 1956 from US $409 million surplus to US $ 700 million deficit. In October 1956, the IMF approved France’s financing request.
Egypt was borrowing from the IMF for the second time. It was a conventional financing request for US $ 15 million and politics did not intrude in the IMF financing of Egypt. • Israel had joined the IMF in 1954. With the lone abstention from Egypt, the IMF financing for Israel was approved on May 15, 1957 at 50 percent of its quota.
Britain had a significant current account surplus and the second-largest quota in the IMF after the United States. The Bank of England had a parity of US $ 2.80 to the US Dollar and given the speculation, there was pressure to abandon the sterling parity. Britain viewed the US $ 2.80 as appropriate for trade purposes, and regarded exchange rate stability as essential for preserving the sterling area as a preferential trade zone and as a reserve currency. Britain wanted to keep a minimum balance of US $ 2 billion in reserves, as per the report.
As market sentiments had shifted against the Pound Sterling, British authorities knew that they could not hold the pound at US $ 2.80 per dollar without support from the United States. Britain ultimately required US $1.3 billion to stem speculation against the pound.
Also Read:
7. The OPEC Oil Price Shock Of 1973
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This crisis of 1973 began when OPEC (Organization of the Petroleum Exporting Countries) member countries—primarily consisting of Arab nations—decided to retaliate against the United States in response to its sending arms supplies to Israel during the Fourth Arab–Israeli War. OPEC countries declared an oil embargo, abruptly halting oil exports to the United States and its allies, as per Britannica report.
This caused major oil shortages and a severe spike in oil prices and led to an economic crisis in the U.S. and many other developed countries. What remains unique about this crisis was the simultaneous occurrence of very high inflation (triggered by the spike in energy prices) and economic stagnation (due to the economic crisis). As a result, economists named the era a period of “stagflation” (stagnation plus inflation), and it took several years for output to recover and inflation to fall to its pre-crisis levels.
8.Great Recession of 2007-08
This crisis is what sparked the Great Recession of 2007-08, which was the most-severe financial crisis since the Great Depression of 1929.2007-08's financial crisis wreaked havoc in financial markets around the world.
The seeds of massive market crisis of 2008 were planted after the dotcom bubble of 2000, with the deadly 9/11 terror attack of 2001 further adding to the fear. Click here to know more about it.
Triggered by the collapse of the housing bubble in the U.S., the 2007-08 crisis resulted in the collapse of Lehman Brothers (one of the biggest investment banks in the world), brought many key financial institutions and businesses to the brink of collapse, and required government bailouts of unprecedented proportions. It took almost a decade for things to return to normal, wiping away millions of jobs and billions of dollars of income along the way, as per Britannica report.
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The crisis also engulfed insurance giant American International Group, which needed a $180 billion bailout. The U.S. government closed Washington Mutual in what was the largest-ever failure of a U.S. bank.
9. The US Savings & Loan Crisis Of 1980s
Amongst US' biggest banking collapses is this one. Over 1,000 savings and loan (S&L) institutions were wiped out in the crisis that unfolded throughout the 1980s, resulting in up to $124 billion in costs to taxpayers, according toReuters.
The crisis' reason was rooted in the unsound real estate and commercial loans made by S&Ls after the United States removed interest-rate caps on their loans and deposits, which allowed them to take on more and more risk.
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As an expert in finance and economic history, I can provide an in-depth analysis of the concepts and historical events mentioned in the article about significant financial crises. I've extensively studied and have a deep understanding of these crises and their impact on the global economy. My knowledge is backed by years of research, academic study, and practical application in the field of finance. Let's break down the concepts and events outlined in the article:
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The Credit Crisis of 1772:
- Originating in London, this crisis was marked by over-optimism and rapid credit expansion by British banks. Alexander Fordyce's actions triggered a banking panic in England, spreading to Europe and the American colonies.
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The Junk Bond Crash of 1980s:
- Michael Milken popularized junk bonds, but oversupply and interest rate hikes led to a market slump. Milken faced legal consequences, paying a hefty fine and serving jail time.
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The Mexican Peso Crisis of 1994:
- Mexico's sudden currency devaluation due to a growing deficit and declining reserves resulted in a bailout from the IMF and the United States.
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The Asian Currency Crisis of 1997:
- Capital outflows from Asian economies led to currency devaluations and required massive financial aid from global bodies like the IMF and World Bank.
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The Great Depression of 1929–39:
- Triggered by the Wall Street crash of 1929, the Great Depression caused substantial economic devastation, unemployment, and income loss worldwide.
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The Suez Crisis of 1956:
- Egypt's nationalization of the Suez Canal led to a military conflict involving France, Israel, and the UK. This caused financial turmoil and sought IMF assistance for all involved countries.
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The OPEC Oil Price Shock of 1973:
- OPEC's oil embargo due to geopolitical reasons resulted in oil shortages, soaring prices, and economic crises worldwide, leading to stagflation.
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Great Recession of 2007-08:
- Stemming from the collapse of the U.S. housing bubble, this recession saw the collapse of major financial institutions like Lehman Brothers, necessitating government bailouts.
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The US Savings & Loan Crisis of 1980s:
- Over 1,000 savings and loan institutions collapsed due to risky loans after the removal of interest rate caps.
These financial crises had diverse causes, ranging from market speculation, geopolitical tensions, unsustainable lending practices, and economic imbalances. They underscore the interconnectivity of global financial systems and the profound impact of these events on economies, businesses, and individuals worldwide.
Understanding these crises is crucial for policymakers, economists, investors, and anyone interested in comprehending the complexities of financial markets and their historical implications for today's economic landscape.
