Aftermath of the 2007 financial crisis in UK - Essay Example

? Is the UK coalition government dealing with the aftermath of the 2007 financial crisis well? The effect of external forces on business organization[Name] [Course] [Professor’s name] [Date] Government bodies all over the world have been hit hard by the 2007 global financial crisis. The UK economy has not been any exception as the condition has become extremely volatile. The economic crisis has proved the enormous monetary loss that is associated with the collapse of the global financial stability, and has enhanced its importance as the stepping stone towards economic growth. The UK government has embarked on a number of missions to sustain the financial sector and the overall economy. This paper will focus on the measures taken by the UK government in the aftermath of the 2007 financial crisis to deal with the effects of the external forces on business organizations. In modern times, has been identified that global financial system is an interdependent system between all the countries (Shiller, 2008, p.xi). The current global financial crisis has created instability of economic systems in most countries including UK to such an extent that the UK government has been compelled to intrude into the financial markets in an unprecedented manner. The financial crisis although has not created problems in the UK constitutional system, nevertheless has proved that the constitution lacks flexibility to cope with financial crisis of such mammoth proportions (Black, 2010, p.1). The crisis has shown that the government has to face legal barriers arising from various unanticipated sources. The European Union (EU) has a rule imposed on state aid which gives more power to the EU Commission than the Westminster parliament to decide the fate of taxpayers’ money. Moreover, various corporate and financial norms restrict the management capacity of the UK government of investments in the banks (Black, 2010, p.2). UK has “globally very active financial services industry with cutting edge financial innovation” (Williams, 2011, p.41). Previously, the UK government had a “tripartite” regulatory system which allowed the Bank of England, the Financial Services Authority (FSA) and the Treasury to contribute towards maintaining economic progress in the country. However, the government felt that this system failed in three ways – a) it failed to assess any troubles that hinder economic progress, b) it could not assess appropriate steps to tackle such hindrances, and c) it failed to act effectively at the onset of the crisis (Giudice et al., 2012, p.17). The effects of the global financial crisis first created waves in August 2007 and were enhanced throughout 2008. The impact of the crisis reached its peak in September/October 2008. Several financial institutes were rescued like the Northern Rock in UK. However, it was not before late 2008 that any major fiscal and monetary policies were established as response to the crisis. Most of the policies were put into practice only after the fall of Lehman Brothers in September 2008. Even in March 2008, the Treasury claimed that the government is duly abiding by all fiscal regulations and economy is stable. This indifferent perception was changed as a result of the events that occurred in September/October 2008. A reduction was made for a temporary period in VAT from 17.5 percent to 15 percent. In the end of 2009, it was brought back to the original rate. Moreover, the government made provision of ?3 billion for capital spending. In the beginning of the global crisis, the approximate valuation of public sector net borrowing (PSBR) was increased by 2.4 percent of GDP to 5.3 percent. Out of this, 0.6 percent was used for “discretionary budget changes” (Sawyer, 2011, p.206). In a wider context, the UK government has made plans and policies in response to the economic crisis with three main goals. First, the UK government has provided capital support to banks to reinforce their balance sheets. Secondly, the government has taken steps to enhance the competence of banks so that they can utilize the financial system to procure liquidity. Thirdly, banks are induced to make credit easily approachable by the broader UK economy. There are three elements attached to the measures taken to support the UK banking system. First, for the purpose of stabilizing the financial system, the government notified a recapitalization scheme on 11 October 2008. According to recapitalization scheme, government allows funds for capital to enable the eligible institutions to revitalize their balance sheets. Since this scheme is non-discriminatory, therefore any UK banks that have strong business foundation or any UK subsidiaries of foreign bodies can avail of this scheme. Second, as per guarantee scheme notified the by government, banks are provided guarantee against short and medium term loans. The eligible banks are mostly efficient but because of the ongoing crisis are finding it difficult to procure funds. The third element is provided by the Bank of England which is expansion of short term liquidity steps (Jung, 2009, p.136). As measures to support the real economy, the UK government on 25 February 2009 reported a guarantee scheme to “support the provision of working capital loans to businesses operating in the UK market, including subsidiaries of foreign firms” (Jung, 2009, p.137).. The guarantee is provided to cover loan portfolios of banks which are provided to companies that have annual turnover of maximum ?500 million. The principle condition of this scheme is that the funds released by the government shall be solely utilized for the purpose of extending loans to businesses. However the guarantee extended only to healthy assets and not the impaired ones (Jung, 2009, p.137). There are three measures to this scheme – a) Capital working scheme worth 10 billion pound to cover 50 percent of any existing or new loans granted by banks to, b) Enterprise Finance Guarantee Scheme worth one billion pound to help small companies whose performances are efficient by covering 75 percent of their loans procured from banks, c) Capital for Enterprise fund worth 75 million pound to “convert debt to equity for small business” (Jackson, 2009, p.27). In 2009, the UK government also announced an asset protection scheme in order to enhance the loan providing ability of banks. As per this scheme, a portion of banks’ balance sheets will be protected against any future losses. This scheme is characterized to ensure that there is smooth flow of loans to businesses that are performing efficiently (Jung, 2009, pp.137-138). On November 24, 2008 the Labour party submitted a plan to the UK Parliament to battle the declining economy in the aftermath of the crisis. The proposals suggested several tax cuts and government funded projects all of which was valued at 20 billion pounds. The stimulus package covered a range of proposals: value added tax (VAT) to be reduced by 2.5% for 13 months, to defer the rising of corporate tax rate, and government should be covering banks loans to provided small and middle sized businesses. There was also an additional proposal that government should be spending “4.5 billion pounds on public works, such as public housing and energy efficiency” (Nanto, 2009, p.59). Such costly proposals implied that government budget deficiency in 2009 would increase to reach 8 percent of GDP. This would result in many unsavory situations (Nanto, 2009, p.59). During the crisis, the UK coalition government allowed Foreign Direct Investment (FDI) to contribute towards inflow of money in the country. During 2006-2008, the average of outward flows showed that UK was the main investor in countries outside the EU, along with Luxembourg. During the 2007 crisis the outflow of money to partner countries of UK declined to a large extent. During this period FDI started investing money on the economic sector to deal with the crisis. The UK coalition government with such effective decisions helped the financial sector to take a boost on the crisis (Goncalves & Karkkainen, 2010, p.3). It has been identified that UK banks were leading in the world markets before the crisis. To bring into control the financial stability the UK government has set plans to impose a levy on banks to estimate cost savings of banks while enjoying the result of their ultimate state guarantee. Apart from that a new system of financial regulation and a microeconomic policy agenda has been planned to direct the economy once again towards exports and investment (Tallon, 2010, p.106). The UK coalition Government responded in various ways to overcome the crisis. Government wanted Northern Rock bank to put a rein on its loans to give chance to other banks to increase loans to small firms and individuals. Then there was requirement for bank recapitalization to maintain confidence in the UK banking sector. Banks which were unable to raise additional capital through the help of the private sectors received support from the government (Banking Crisis, 2009, pp.112-113). In the aftermath of the crisis the insurance and banking sectors got highly interconnected. Particularly the life insurance sector took part actively in capital markets which includes high risk. This was done to add extra profit and benefits with high risk transfers. The insurers started participating in daily deals with the help of the banks (Baluch et al., n.d. p.27). From the above discussion one can say that UK coalition government took part actively to deal with the financial crisis in various ways although all efforts were not successful. Prompt intervention by the government has resulted in success to large extent in overcoming the crisis. In recent time the volatile condition of the market has been reduced though uncertainty is still there. The government has managed the recession in a pretty tactful way and so in spite of the crisis public sector and private sector still continues to provide jobs and remain stable as a whole. Although economic growth is still lower than usual because of the ongoing crisis, the fear of economic instability had reduced and confidence has returned that business organizations will remain stable. References 1. Baluch, F, Mutenga, S & C. Parsons (n.d.) Insurance, Systematic Risk and the Financial Crisis. Retrieved on August 1st 2013, http://cassknowledge.co.uk/sites/default/ files/article-attachments/369~~chrisparsons_insurance_and_the_financial_crisis.pdf 2. Banking Crisis: dealing with the failure of the UK banks (2009) Report together with the formal minutes. The House of Commons. Retrieved on August 1st 2013, http://www.publications.parliament.uk/pa/cm200809/cmselect/cmtreasy/416/416.pdf 3. Black, J. (2010) Managing the Financial Crisis. Law Society Economy Working Papers. Retrieved on August 1st 2013, http://www.lse.ac.uk/collections/law/wps/WPS2010-12_Black.pdf 4. Giudice, G, Kuenzel, R. & T. Springbett (2012) UK economy: the crisis in perspective, Routledge 5. Goncalves, E. & Karkkainen, A. (2010) Economy and Finance. Eurostat, Statistic in focus 6. Jackson, J.K. (2009) Financial Crisis: Impact on and Response by the European Union, DIANE Publishing 7. Jung, N. (2009) United Kingdom: Stabilising the UK - a brief Oerview of Measures adopted by the UK Government. European State Aid Law Quarterly, 8(2), 136-138 8. Nanto, D.K. (2009) The Global Financial Crisis: Analysis and Policy Implications, DIANE Publishing 9. Sawyer, M. (2012) The tragedy of UK fiscal policy in the aftermath of the financial crisis. Cambridge Journal of Economics, 36(1), 205-221 10. Shiller, R, J. (2008) The Subprime Solution. UK: Princeton University Press 11. Tallon, A. (2010) Urban Regeneration in the UK, USA: Routledge 12. Williams, P. (2011), The credit crunch in the UK: understanding the impact on housing markets, policies and households, pp.41-56, In Forrest, R. & N.M. Yip (eds) Housing Markets and the Global Financial Crisis: The Uneven Impact on Households, Cheltenham: Edward Elgar Publishing Read More