Financial crisis | Meaning | Classification | Benefits

What is financial crisis?

Financial crisis refers to the economic situation of a country, perhaps when you hear the term crisis, it will lead us to think, things are not beneficial for the country; but we often mistake it, as the financial crisis has its own benefits or advantages.

Financial Crisis - Meaning, Classification, Benefits
Financial Crisis – Meaning, Classification, Benefits

This article briefly explains classification and the benefits of  financial crisis.

Classification of financial crisis

We can classify financial crisis as three main types namely

  1. Currency Crisis,
  2. Banking Crisis,
  3. Debt Crisis.

1. Currency crisis

Currency crisis occurs when a run on a currency translates into a devaluation (or sharp depreciation), or force the monetary authorities to defend the currency by using a large volume of central reserves or a sharp increase in rates of interest.

2. Banking Crisis

Banking crisis is the situation where bankruptcies and massive withdrawals of deposits from banks (actual or potential) induce them to suspend the internal convertibility of their liabilities or compel the authorities to intervene by providing large-scale assistance and thus prevent bankruptcies and / or deposit withdrawals.

3. Debt crisis

Situation in which a country can not meet the payment of the debt service to the outside, whether sovereign or private is called debt crisis.

Financial crisis of 2008

The financial crisis began in the US in August 2007 and subsequently became a global financial crisis, which is the latest in a series of similar episodes experienced by economies of various regions of the world during the last decades. In 2001, Argentina’s economy was devastated, which started as a financial crisis.

In the 90’s we witnessed currency crisis that occurred within the European Monetary System in 1992-93 and in Latin America (“Tequila effect” of 1994-95) and the deep financial crisis in East Asia (the 1997-98 crisis in Korea, Indonesia, Malaysia and Thailand) and subsequently had its effects in Russia and Brazil.

We know that Financial crisis are costly to varying degrees, and particularly when the crisis is affecting the banking system, as they are in terms of fiscal and quasi-fiscal costs necessary to achieve the restructuring of the fragile financial systems.

The cost of resolving banking crisis in some cases has reached 40% of GDP, while bad loans have sometimes exceeded 30% of total loans.

It seems everything was disadvantages, but financial crisis has its own benefits.

Benefits or Advantages of Financial Crisis

Here are 7 good things that will help an economy with, when they are left in crisis.

1. Creativity

In difficult times, we will foster creativity. True, we look for more efficient and different ways to earn. We look to work for extra income and savings to overcome the financial crisis. These are things that can keep us all life long after the financial crisis is gone. Same for businesses and retail businesses. They are forced to identify new ways to attract customers, lower costs and keep winning.

2. Eat healthy

The need to save obliges us to eat less in the street and buy less junk during the times of financial crisis. Inevitably, we eat things prepared by us or by someone who loves us and unless we prepare potatoes and frozen chicken wings every day, it is generally much healthier.

3. Regulation

The markets have to be regulated and that means more security (or less risky) in the future. Financial crisis helps banks to learn that they should not lend indiscriminately nor speculate with money that they do not have.

4. Credit

Although poor, we learn (as families and nations) that the borrowed money is very expensive and that 90% of the time the cost of borrowing is not worth it. One of the big advantage of financial crisis is that it teaches us the value of self reliance at times of crisis.

5. Learn to say NO

“I can not buy everything you want” – You would not have forgotten this when your father shouted at you. It is also time to teach ourselves to tell “NO”. Times of financial crisis teaches us that, the need for ipod, travel, restaurants or private yoga class are not necessities, while there is no insurance for our food and shelter.

6. Get to know us

In difficult times we discover ourselves. A financial crisis helps us to learn who we really are and what we are made. We realize the importance of our own portfolio management when there is a crisis like situation.

7. Improvements in prices

Inevitably financial crisis helps lower the prices of many goods and services, and that will help our personal guarantees.

As we see, it is essential that when you hear the term “financial crisis“, do not just think they are disadvantages, or the worst in our country but also learn more about the subject and fill yourself with positive thoughts that we presented above as useful and beneficial.