Current Governmental Financing Problems in Capital Markets - Essay Example

Name Course Tutor Date Capital Market Capital market, which is either primary or secondary capital market, is a security market including debts and equities, used by both business enterprises and governments to provide themselves with long-term finances, which are always issued for a duration of more than one year . This market is an integral segment in the financing system of different business enterprises and governments since it is an available market for both the parties to meet their long-term needs. It represents all facilities and institutional arrangements necessary for borrowing funds and lending them, therefore having concerns on raising money capital for long-term investment purposes.The long-term capital is mostly demanded by agriculrtural sectors, manufacturing industries from private sectors and the government agencies (Sullivan,120). Government finance Such funds are always obtained from banks, corporations, cooperate savings, individuals savings, government agencies,insurance companies, non-bank financial institutions and more importantly the government surplus. The contribution of the governments in the capital markets have always had a profound effect in transforming the economy as well as empowering and reviving business enterprises that are almost collapsing.It is as well very crucial in accelerating the regional development of venture capital sectors. The government financing problems However, of recent several governments have been faced by a variety of problems with different impacts on the economy, including the stock market. This effect was much felt during the global economic recession that took place leaving majority of countries hit with a terrible economic crisis, leading to currency depreciation in some countries, as such the capital market funding was therefore very hard to be obtained. Some government financing problems Failure of current governments to finance the capital markets have been attributed to several factors that directly or indirectly affect the finances and disposable income of individuals and organisations. International competitions have also been source of capital market financing problems. The finacing problems include: The financial crisis The 2007-2010 financial crisis greatly affected the governments’ ability to finance most of their activities, including the capital market. This more so resulted in the lowering of GDP of different countries around the globe hence making them find difficulties in meeting their normal financial responsibilities. Some of the impacts of the economic crisis were more evident including the trade deficit in various countries, which left the countries at a poor economic state, for instance in spain the trade deficit had swelled up to 10% of spain’s GDP by 2008. This resulted in a competitive loss against other trading partners and high inflation rates in the country thereby making the nation to have difficulties in achieving its financial goals (Brenner,117). Debt crisis The euro debt crisis is also among the problems that hinder the governments from getting more financing to meet their domestic need, since they are facing the crisis. This comes as a result of debt-fueled economic policies developed by the local policy makers and implemented by the central banks, which also translates in to the budgets having no surplus, with the level of percentage debt being high. This is also true for spain’s public debt which was very high, if put as a GDP percentage. Employment crisis The governments are also faced with the employment crisis where the level of unemployment is increasing by the day, for instance spain is considered as a country with the Europes largest unemployment crisis, considering that 1.2 million jobs were shed in a period of one year,mainly due to the poor performance in the industries related to housing. The ever increasing immigrants also worsened the already existing condition. The level of unemployment translates in to poor economic performance hence loosing investor confidence. This has adverse effects on the governments ability to fund to raise funds and finance its activities . Inflation rate The inflation rate is one of the major problems that affect the government financing since the governments depend much on imports hence are affected by the inflation rates due to price increases, this does not provide opportunities for the governments to finance the capital markets or even lend to others, which implies that there exists financial deficit hence some other trade partners may be affected while the government may also have a strict budget, not enough to finance the capital market activities. For instance the government of greece and spain left their deficits to be high and without control thereby having financial problems. The budget deficits also translate in to decrease in the values of the bond market, apart from absorbing finacial resources that are scarce while at the same time increasing the chances of market panic damage (Neal,134). Defaults Banks in some countries are also responsible for the government’s reluctant financing especially considering that some banks hold huge debts of their countries. Such defaults result in the banks incurring huge losses, which have great potentials of putting them in an insolvency situation. This has great impacts to banks with some banks loosing their eligibility as collaterals of ECB, leading to the decrease and final diminish of funding sources . this impact is very huge to the economy of the government and its trading partners, as in the case with spain (Riley,142). Population Among the major problems the governments are going through and which to a larger extent affect their budgetary allocations and expenditures is the growth in population. The immigrant individuals add more burden to the budget of the nations considering that there requirements are also paramount to the economy planners, just as that of the natives, as they also require employment , healthcare and proper shelter. In order to meet the demands of the general population, the governments therefore have to cater for the additional population by cutting down their expenditures, therefore having little surplus after catering for these needs. The effects are widely felt as the governments can no longer be able to meet their financial goals and the increasing population needs, hence investing a little portion of the finance on developments. Sometimes this may result in the country borrowing from within or abroad in order to sustain its normal activities. Some countries also face physical as well as human infrastructure which renders them to become very incompetitive , having great negative impacts both currently and in the future. for instance the countries with the aging populations , especially the generation of baby boomers who are greatly declining the europe’s working population, as they constitute the largest percentage. Such factors tend to affect the financial position of countries leaving the countries with a an unproductive population hence affecting the economic performance. This leads to financial difficulties in the countries, for instance countries like greece and spain (Ferguson, 176). Investor confidence The decreasing investor confidence can be termed as one of the major contributory factors to lack of adequate government finance. The investors are always pillars of the economy and reflect much of the economic performance. Their presence signifies economic growth. The low investor confidence has really been a catastrophe in many countries leaving them more devastated economically, with their financial performance being so low. Such results are blamed for the poor performance in the capital market as the government may not be able to raise finances to support the capital market. Reduced bank saving Reduction in the long term savings have a great bearing on the performance of the capital market and the financial status of a country because this translates in to less finances readily available for the stock market and government programmes, since it reduces the budget surplus hence resulting in poor economic growth, with a resultant low finance within the government. Countries are also much affected by this since they also borrow from the capital markets when in deficit of funds to run their activities. Decreasing disposable income Decreased disposable income due to the economic condition has affected the level at which the individuals are willing to inject more finances in to the capital market. Many governments have taken necessary steps to encourage people to participate in these ventures but that will still be determined by their willingness. Some governments, on the other hand, have been affected by this due to the decrease in the level of investments within these countries hence their long-term financial position have been altered, leaving them to borrow from other countries, as in the case of spain (Barron, 200). The credit rating Government’s credit rating seems to play an integral part in the borrowing capability of a country. Poor credit ratings among different countries have massively transformed the ability of the countries to obtain more financing from donor countries hence slowing down the expansion of the economies in different sectors, including financing the capital market. Conclusion The problems related to capital market funding are many and with varying impacts, therefore they are a major concern all over the world , with many nations being keen on the performance of their capital markets especially considering that the capital markets have great importance to business enterprises and play a major role in various economic systems. the governments always look up to them for protection and financing. the capital market which are competitive aretherefore positively correlated with the growth of the nation, apart from being issues of public policy and financial security Works cited Neal, Larry. The Rise of Financial Capitalism: International Capital Markets in the Age of Reason. London: Cambridge University Press, 1993. Sullivan, Arthur. Economics: Principles in action. New York: Pearson Prentice Hall, 2003.  Ferguson, Niall. The Ascent of Money: A Financial History of the World. London: Allen Lane, 2008. Larry Neal (Author) › Visit Amazon's Larry Neal Page Find all the books, read about the author, and more. See search results for this author Are you an author? Learn about Author Central Brenner, Reuven. Force of Finance: Triumph of the Capital Markets. London: Texere, 2002. Barron, Jonathan B. A History of Corporate Finance. London: Cambridge University Press, 1999. Riley, James. International Government Finance and the Amsterdam Capital Market 1740- 1815. London: Cambridge University Press, 2009. Read More