Topic Analysis - European Financial Crises Essay

Topic Analysis - European Financial Crises - Essay Example The origin of the global financial turmoil was the collapse of the real estate bubble in the United States, mainly the sub-primes1 mortgage market, which provided access to housing finance to almost everyone even those without the necessary guarantees. The problem was further aggravated by the securitization2 of sub-primes leading a contagion in the financial system, which resulted from massive defaults on the original loans that had been securitized (Ferguson, 2012, p. 19). There was high mistrust among commercial banks in the financial systems, which led to freezing of the interbank market, severely affecting liquidity distribution and forcing institutions to bankruptcy, both because of reduced activity in the interbank market and as financial institutions continued to sell even the good quality assets in fear of the unknown, or as a consequence of increased uncertainty. In the period 2006-2007, there was increasing panic as news of bankruptcy of firms such as Lehman Brothers and Morgan Stanley in the USA and Dexia in Europe, continued to stream. Some of these firms were however bailed out by the governments of the USA and Europe. In 2008-2009, the financial crisis began to hit the global economy3, introducing the first recession since the times of World War II. In EU alone, GDP went down by about 4.1% while rate of unemployment4 increased by 3.9% between 2008 and 2010 (Manfred, Griesbach, and Jung, 2011, p. 292). These were firm indicators to justify that there was indeed a heating problem that needed quicker action to resolve to avoid dire consequences. This paper will attempt to explain the Euro zone financial crisis and particularly explore the hypothesis that the â€Å"European situation has the potential to become a financial â€Å"time bomb†, which could destroy the euro as a currency, send global financial markets into a tailspin and global recession†. In doing this, the paper will address the