2008 Financial Crisis Research Paper

Document Type:Research Paper

Subject Area:Finance

Document 1

As such, the banks ran out of funds not only for mortgages but also for customary daily business. The situation, that is the deficit in the collection of debt as well as the reduced access to credit resulted in the banks as well as various financial institution running into bankruptcy or near collapse. As a leading economy with significant influence on the global market, the financial crisis did not only affect the United States, other nations way beyond America's border were also affected by the 2007-2008 financial meltdown. With this in mind, it is the objective of the current study to evaluate the 2007-2008 financial crisis and its effect on UAE and Dubai financial market. Causes of the Global Financial Crisis According to Claessens & Kodres (2014), the primary cause for the global financial meltdown was as a result of loan defaulters failing to pay financial institution loans they had taken.

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With the economy slowing down, Nelson & Katzenstein (2014) argues that debtors, as well as lenders, came to the realization that defaulting laid ahead. As such, borrowers started to walk away from the properties they had borrowed money and could not afford to pay back the financial institutions. This resulted in the firms realizing that the mortgage asset bundles were only worth a fraction of the value they were traded at. The banks were left with no capital for new mortgages or any financial resources to roll over old mortgages. Bankruptcy was knocking on their door and various financial institutions needed outside help to facilitate normal lending or face a collapse. Globally, the financial crisis was felt with different nations being affected differently.

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The current study focusses on the effects of the financial crisis on the money markets of United Arab Emirates and Dubai Effects of the Financial Crisis On Dubai The United Arab Emirates and Dubai are among the world’s largest emerging economies. The economies have demonstrated significant growth in the last few years or more. In as much as the growth of its economy cannot be compared to the rate at which economies such as China and India are growing, it is essential to note that the United Arab Emirates economy has massive potential and has lately been attracting foreign investments from across the world to its land. The UAE despite its instability as a result of the various wars it faces has been able to realize a sustainable pace of development (Onour, 2017).

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The decline in the international stock market also affected the sovereign wealth fund of the UAE with market analyst estimated the loses to be between 20-30 percent during the crisis in 2008. Among the prices that fell significantly according to Al-Mohana & Hatemi-J (2016), was the prices of the real estate market with the correction significantly pronounced in Dubai where real estate prices had previously grown sharply. Whereas the credit default swap assessments increased across the board, risk assessment for Dubai was observed to be more unfavorable when compared to other Gulf Cooperation Council countries. Reflecting on global development, equity markets have shown significant confidence since 2009, however, lately, this trend has been overturned. In the first ten months after the crisis that is in 2009, the indices for the gulf cooperation countries market indices gains were realized in as much as stock market level were still enormously below pre-Lehman collapse levels.

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With banks as the primary triggers of the financial crisis, it was likely that they were the ones to be most affected. This is apparent not only in UAE but the world at large where banks faced challenges of liquidity. After the Lehman brothers were declared bankrupt, the world market awakened with the concern of every nation being to address the problem. With regards to the UAE, Mirzaei (2018) observes that the administration met the central bank to evaluate the effects of the financial meltdown on the region's banking sector. The central bank in its attempt to calm down tension advised the government that the region's banking system was not exposed to the financial meltdown and thus there was no worry of the systematic risk expected from the meltdown.

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Another effect of the financial crisis on UAEs financial market is that it lowered investors’ confidence. As a region, UAE is a development hub attracting investors from across the world. In order to attract investors, the region depended significantly on the trust investors had in its financial systems. In as much as poorly performing stocks and bond markets were apparent in the wake of the financial crisis, investor confidence was dealt a huge blow yet it could not be easily seen. At its most basic form, the trust and confidence among investors is the foundation of the global financial system. According to Nazlioglu, Soytas & Gupta (2015), the reduction in prices can be argued to be as a result of the decreasing oil and gas company revenues.

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The tight credit conditions that were as a result of the financial crisis also resulted in a number of producers and explorers paying higher interest rates when looking for capital investments and thus affecting their future earnings. The effects of the crisis were first felt in the real estate market as economies including the UAE economy started to experience defaults on subprime properties at an alarming rate. It moved from the real estate to significantly reducing economic activities in the region as the crisis spread through the economy. For a given period of time at the start of the crisis, the prices of various commodities rose even though housing markets weakened. References Al-Mohana, S. , & Hatemi-J, A. The Impact of Recent Crisis on the Real Estate Market on the UAE: Evidence from Asymmetric Methods.

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