Financial Crisis - Living Will in the Investment Banking - Dissertation Example

Banking systems are shaped by financial stability arrangements. As the European Union ponders reforms towards its financial arrangements, it is in the course of determining which type of financial system it will have in the future. The financial crisis has brought the long-building tension between progressively more transitional financial institutions and national financial stability arrangements to a breaking point. The European Union now needs to select how to eliminate that tension that will eventually shape its economic and financial future. 1.1.

The CrisisThe European financial crisis is the shorthand term for Europe’s struggle to pay the debts it has built-in recent decades. Countries across Europe were struggling to find ways to cope with the growing financial problems. From the nationalization of domestic banks to multi-billion cash injections into the capital markets, the regulators, politicians, and market players are trying diverse advances to deal with the mounting financial pressure. The outcome of the Euro financial is uncertain, crushed by debts and distressed banks, countries like Spain, Greece, and Ireland face ongoing recessions, while the Netherland and Germany along with members of the International Monetary Fund, push for strict measures.

These countries failed to generate efficient economic growth to make their ability to pay back bondholders the guarantee it was intended to be. The crisis has far-reaching costs that extend past their borders to the world as a whole. Euro financial crisis is one of the most important problems facing the world economy, but it is also one of the hardest to understand.Since the U.S. financial crisis of 2008-2009, the global economy has experienced slow growth which has exposed the indefensible fiscal policies of countries in Europe and around the globe.

Greece, which spent heavily for years and failed to embark on fiscal reforms, was one of the first to feel the heat of the weaker growth. The slow growth was accompanied by low tax revenues hence unsustainable budget deficits. Greece's debts were so large that they actually surpass the size of the nation’s entire economy. In response, the investors demanded higher bond yields, which raised the cost of the country’s debt burden and required a series of bailouts by the European Central bank (ECB) and the European Union.

The markets then started driving up bond yields in the other greatly indebted countries in the region, expecting problems similar to what occurred in Greece. Investors are always speculators and whenever they suspect risky investment, they will anticipate a higher return to compensate for their risk. This will lead to a vicious cycle: the demand for higher yields is associated with higher borrowing costs for the country in crisis, which results to further fiscal strain, hence investors ’ higher yield demands.

The resultant loss of investor’s confidence characteristically causes the selling to affect not just the country in question, but also other countries experiencing a similar financial crisis- generally referred to as “contagion”.