Economics Help

Solutions to Financial Crisis

Readers Question: I have recently read an article stating that “a country has only four options for getting out of a financial crisis: devalue, inflate, default, or deflate”… Would you be so kind to explain what these options comprehend??

Firstly, when people refer to a financial crisis they could refer to different economic problems .

  • Recession – fall in output, negative economic growth and higher unemployment (e.g. Great depression of 1930s, Recession of 2008-09)
  • Banking crisis – banks lose money, go bust. Fall in money supply. (e.g. Credit crisis of 2007-08. Bank failures during 1931 in US.)
  • Government fiscal crisis . When government borrowing increases and markets fear it is not sustainable. Leads to higher bond yields and the threat of government default. E.g. Greece bond crisis.
  • Exchange rate crisis – rapid fall in the value of exchange rate.

Often problems are related. In a recession, government borrowing tends to rise, an economic crisis can lead to a fiscal crisis. In the case of Ireland, the banking crisis got absorbed by the government leading to the fiscal crisis.

Options for the financial crisis

This means to reduce the value of your exchange rate. For example, in 1992, the UK was in the ERM. The value of the Pound was semi-fixed against the D-Mark (£1=3DM). But, in September 1992, the government left the ERM and allowed the value of the pound to fall. (see: ERM Crisis ) Devaluing exchange rate makes exports cheaper which helps boost growth.

In the case of the Euro, one possibility is for Greece to leave the Euro and restore their own currency. This would lead to an effective fall in their exchange rates and help the economy become more competitive.

After the financial crisis, Iceland devalued Krona by 35% in 2008. This helped Iceland because Icelandic exports became cheaper, leading to increased demand for exports and providing a route to higher economic growth.

The disadvantage of devaluation is that import prices increase so consumers who rely on imported goods will have a fall in the standard of living.

2. Inflate/expansionary fiscal policy

Inflate means to try and boost aggregate demand in the economy to create higher economic growth. For example, in a recession, the Central Bank could cut interest rates, print money or pursue quantitative easing. This leads to an increase in the money supply and can help to stimulate economic activity; it is also likely to cause inflation

As well as monetary policy, the government could pursue a fiscal stimulus – this involves higher government spending, lower tax – usually financed by higher government borrowing. For example, in the 2009 recession, the UK and US governments pursued expansionary fiscal policy.

Higher inflation also makes it easier for the government to pay back its debt. In fact, inflating away your debt is seen as a kind of a partial default. The government finds it easier to pay back debt and bondholders lose out because their savings are worthless after the inflation the

e.g. in the 1920s, Weimar Germany printed money to pay war reparations leading to hyperinflation.

Default refers to the decision by the government to stop repaying part or all of its debt. This will make it difficult for the government to borrow in the future, but it means they don’t have to aggressively cut spending to reduce borrowing.

When government borrowing as a % of GDP increases rapidly, it becomes quite difficult to control borrowing. In order to meet interest repayments, and reduce the debt burden, the government may be forced to pursue fiscal austerity (cut spending, increase taxes). However, cutting spending in a recession can make it worse. e.g. the attempts by Greece to cut spending have failed to reduce their budget deficit. The deficit continues to rise and it has created social instability; they are also likely to default anyway. A better option may have been for Greece to admit they were going to struggle to repay debt and default on their bonds earlier. It means investors in Greek bonds would lose some money. However, it gives Greece a chance to enable economic growth and in the long run, this may be a better deal for bondholders. Rather than still default, but also have a longer period of economic decline.

  • Default explained

Deflate refers to policies to reduce inflation. It would involve

  • ‘Tight’ monetary policy – higher interest rates to reduce spending
  • ‘Tight’ fiscal policy – spending cuts, higher taxes. Tight fiscal policy also reduces the level of government borrowing.

Deflating the economy will tend to reduce growth and reduce the rate of inflation.

e.g. many countries in the Euro have been trying to solve their fiscal crisis by reducing government spending.

However, it is difficult to solve the problem by relying on deflation alone. Deflating economy leads to a painful period of adjustment (lower unemployment lower growth)

  • Policies to increase economic growth
  • Difficulties in preventing a recession

8 thoughts on “Solutions to Financial Crisis”

I still canon understand how inflation makes it easier for the government to pay its debts.

During inflation period there is a lot of money in circulation with lower purchasing when compared to the time the loan facility was extended by the lender. During the period under inflation other items can be adjusted for inflation, but the loan balance will not be adjusted upwards to factor in the inflation in the economy. Hence loan repayment will favour the debtor to the disadvantage of the lender. For instance, at the time the loan was being given a litre of petrol was being sold at say $1, but now due to high inflation rate the same one litre of petrol is being sold at say $ 2.

In short the purchasing power of money during the two period are totally different to the disadvantage of the lender.

You said that if Greece leaver Euro, Drachma will depreciate. Why will this happen?

  • Pingback: Solutions to Economic Crisis | Economics Blog

The U.S. government is trying to solve our financial problems but does not have the tools to do so.Like N.Y. City in the 1970’s we have borrowed ourselves into insolvency. It is not just us that is in trouble, but most of the countries in the world. It is obvious that this is a world problem and needs a world currency,convertible into the other nations currency, but supervised by a world bank governed by regulators from each nation. We have to understand that we are literally a one WORLD economy.

Besides the fact of the U.S. government being in shape it is in, financially, economically and socially. United States was once a great powerhouse of a nation producing new ideas, patents and even technologies. These things made us the great nation we once were and led us to every other country investing in our currency. But since the late 1970’s the United States started on a slow decline of producing and instead began consuming at three times the rate we produce; placing the U.S. on a road of debt. There is no way to counter this enormous debt we have accrued, we all, as a nation, should just take responsibility for our actions accept the consequences, make some cut-backs and deal with it; let these things be a lesson for our future government, society and life. America has turned to a nation which wants everything now, and wants it without having to give up anything; we have pressured companies and the government to change our once existing policies to appease this, we should’ve known one day we would have to pay for getting everything for nothing.

🙂 Powerhouse with ideas!!!. I only can say one thing that will answer to your great country as stated!!! a country that is 99.5% poor with debts and only 0.5% rich is not even close being a fair country. I love this line where most presidents say lets make America great once again!!! there is no history proofs that it was ever.

nice article for crisis economics

Comments are closed.

web analytics

Helping Countries Cope with Multiple Crises

Photo: Shutterstock

Photo credit: Shutterstock

This year’s Spring Meetings of the World Bank Group and International Monetary Fund took place at a time of overlapping global crises.  The war in Ukraine has compounded concerns about inflation, COVID-19, climate change, and debt, with many other countries also facing fragility and conflict.

The chair’s statement issued on Friday by the Development Committee, a ministerial-level forum that represents 189 member countries of the two organizations, noted that the impacts will be felt most in low- and middle-income countries, especially by their most vulnerable people, including women and children.  The statement added that economic recovery is at risk amid geopolitical tensions, with investment, trade, and growth affected, even as countries face further risks from the pandemic and uneven deployment of vaccines.

While the war and its repercussions were top of mind, the Spring Meetings also convened a series of public events to advance dialogue on major, ongoing development challenges.  Policy makers, experts, influencers, and other key stakeholders discussed digital development, climate action, trade and subsidies, fragility, debt, and human capital. Among key takeaways from the meetings :

  • Digital technologies are transforming many jobs and services ; they can help enable long-term growth and prosperity, as well as build resilience to crises.  But many people in developing countries remain unconnected or are not yet benefiting.  A collective commitment from the public and private sectors is needed to close the gaps and build an equitable digital economy for all.
  • To address both climate change and development , we need to move from high-level commitments to real, tangible action, including large-scale investments that support a low-carbon transition and build resilience.
  • Fragile and conflict-affected economies need investment and a vibrant private sector to create jobs, generate economic growth, and build infrastructure.  Forced displacement is a global crisis, but inclusive policies and investment can enable refugees to help bring about social and economic prosperity.
  • To make debt work for development , we must allow for rapid debt restructuring; support medium-term reductions in unsustainable debt burdens; and create better practices so that future borrowing is sustainable, with stronger transparency and accountability for debt contracts.
  • Countries have been innovative in building and protecting human capital – the knowledge, skills, and health that people need to achieve their potential – even as COVID-19 has reversed many of their gains. Sustained political commitment and financing is needed to shore up human capital and support stronger, more inclusive growth.

In his Warsaw speech , Malpass urged countries to take action to avert a global food crisis, to keep markets open, and to encourage investment inflows. He stressed that countries need to broaden the investment base and avoid concentrating wealth and income in narrow segments of the population. He also noted that ensuring security and stability involves constant effort to strengthen institutions, reduce inequality, and raise living standards.  In concluding, he emphasized that World Bank Group is a committed partner in these efforts: “You should count on us, as we count on you to support innovative approaches to the front lines of development. It is here that we can win the battles against the multiple crises we are facing.”

This site uses cookies to optimize functionality and give you the best possible experience. If you continue to navigate this website beyond this page, cookies will be placed on your browser. To learn more about cookies, click here .

Center for American Progress

Real Solutions to the Financial Crisis

Andrew Jakabovics details the Center’s answers to the financial crisis facing our financial institutions and our families.

how to solve financial crisis in a country

Building an Economy for All, Economy

Media Contact

Sarah nadeau.

Associate Director, Media Relations

[email protected]

Julia Cusick

Vice President, Communications

[email protected]

Government Affairs

Madeline shepherd.

Director, Federal Affairs

[email protected]

Emma Lofgren

Associate Director, State and Local Government Affairs

[email protected]

Federal Reserve Chairman Ben Bernanke, right, and Treasury Secretary Henry Paulson, testify on Capitol Hill in Washington, Sept. 24, 2008, before the House Financial Services Committee. (AP/Manuel Balce Ceneta)

Let’s be clear : The heart of the underlying problem now facing Wall Street is the growing number of troubled home mortgages. A bailout plan for Wall Street that does not address the problem mortgages that have led to frozen markets in mortgage-backed securities and their numerous derivatives will ultimately be far less successful—not to mention far less fair to the average homeowner or taxpayer—than one that addresses the problem from the get-go.

Under the plan proposed by U.S. Treasury Secretary Henry Paulson, the Treasury would have very limited ability to gain control of troubled mortgages. Instead, they would buy “troubled assets,” which will be largely residential and commercial mortgage-backed securities and their derivatives held by many financial institutions. Under legislative drafts circulating currently, it also could include any other financial instrument in any sector .

Taking these securities off the books of struggling institutions may stabilize Wall Street for a period of time, which is the prime focus of Treasury. Treasury argues that the broad authority to buy up these troubled assets will have benefits that will trickle down to Main Street in the form of restored liquidity for making mortgages and other credit available. But without control of the mortgages themselves, the plan won’t work.

Under the Paulson plan, Treasury would just be another investor in a pool of loans, stymied by the same conflicts of interest and barriers to loan modifications that have plagued all prior efforts to modify loans to avoid unnecessary foreclosures. While Treasury may try to exhort the servicers to restructure the loans to sustainable levels and prevent foreclosure, they are in no better place to do so under the Paulson plan than under the current voluntary Hope Now Alliance, which Secretary Paulson unveiled with great fanfare but little follow-up earlier this year. Mortgage servicers of the mortgage-backed securities lack financial incentives to help homeowners, fear liability problems if they do so, and face the conflicting interests of various groups of investors that have effectively blocked any serious modification efforts.

This is why the Center for American Progress supports several proposals that return the focus to the underlying cause of the economic spiral: unsustainable mortgages and escalating foreclosures that are dragging down home values, adding to the inflated supply of homes for sale, and sucking wealth from the American economy. These proposals would keep families in their homes, thus also protecting the home equity of their neighbors and communities. Taken together, these proposals would constitute a serious plan for dealing with the root cause of the crisis. Specifically, our plan includes:

Judicial modifications

The draft version of the legislation under consideration in the House of Representatives today includes judicial modifications for mortgages on primary homes under bankruptcy. While investment properties and second homes have long been able to be adjusted under bankruptcy, current law precludes modification of loans on primary residences. The Center believes that as a matter of fairness, the bankruptcy laws should be modified to allow these modifications to be made. In the context of the current crisis, moreover, we believe providing borrowers with the opportunity to seek relief in Chapter 13 bankruptcy can be an important incentive to bring servicers to negotiate modifications with borrowers at risk of losing their homes.

Treasury purchase of mortgages, loan pools, and servicing rights

This current proposal also takes the perspective that helping homeowners in trouble will have a positive effect on local housing markets and Wall Street, and it can be done quickly at scale. Under the various drafts of the bill now being circulated through Congress, Treasury would have the authority to purchase not only securities tied to residential and commercial mortgages but "any other financial instrument" deemed necessary. In contrast, our plan calls upon Treasury to limit its purchases primarily to mortgages, loan pools, and servicing rights. After acquiring the rights to the mortgages, Treasury would triage them to determine which are current and which are delinquent.

Current loans would be sold to Wall Street in new securities, which could be bought with the liquidity provided by the initial sale, while the delinquent mortgages would be analyzed and restructured to match the borrowers’ capacity to repay. Those that cannot be made to be sustainable would proceed toward foreclosure. But the many additional homes would be prevented from falling into foreclosure. Treasury would then resell the restructured mortgages back to Wall Street with a guaranty and make money on the difference between the steeply discounted purchase price of the non-performing mortgage and the price of the new, sustainable mortgage. This process would keep many borrowers in their homes while providing greater certainty to Wall Street by eliminating troubled securities and replacing them with far less risky ones.

Getting mortgage servicers to participate

In order to encourage participation in the Treasury program, some have suggested banning investor lawsuits or indemnifying mortgages servicers for participating. In both cases, the cost to the government could be substantial. In the first, investors could potentially bring a takings claim for the value of the lost right to sue for breach of their pooling and services agreements, or PSAs, with investors. In the latter, indemnification could make the taxpayers liable for any damages awarded to investors by participating servicers. While neither solution gets directly at the underlying problems in the conflicted structures of PSA contracts and incentives, they do provide some legal breathing room for servicers to begin making modifications.

The Center believes an optimal solution to the issue of servicer participation is a modification of Real Estate Mortgage Investment Conduit laws and an exception for program participants from certain accounting standards. Under CAP’s proposal, REMIC status would be denied to any trust holding these securitized assets whose instruments block sales of mortgages or pools into the program. Similarly, we propose a fix to accounting rule, FAS 140, so participation does not blow up the Qualified Special Purpose Entity, or QSPE, tax status of these trusts.

Under the REMIC fix proposed by CAP, the government is merely changing the tax code, which it does all the time without paying any compensation. While there may be lawsuits, we believe the government would be in a very strong position to win such suits and not have to pay any compensation at all.

Andrew Jakabovics is Associate Director of the Economic Mobility Program at the Center for American Progress. For more detail on our solutions to the financial crisis and our analysis of the problems, please go to the Housing page of our website.

The positions of American Progress, and our policy experts, are independent, and the findings and conclusions presented are those of American Progress alone. A full list of supporters is available here . American Progress would like to acknowledge the many generous supporters who make our work possible.

Andrew Jakabovics

Market Business News

Financial Crisis: How Every Country Handles It

Financial crisis - image for article 32123

During a crisis, business owners and end-users are unable to pay their debts, and financial organizations suffer from shortages of liquidity. The term liquidity refers to how fast an asset can be converted into cash. If you have liquidity problems, you have difficulties accessing cash.

Financial crises are often linked to market jitters, i.e.,  market anxiety, in which investors may sell some or all of their assets or take out money from their savings accounts to cover debts. It may have an effect on the economy of a country, region, or throughout the world. Market jitters are contagious, they can spread very quickly.

Causes of a Financial Crisis

There is no one single cause for a financial crisis. It is the result of a combination of several different factors.

Some of the key factors are:

  • Financial Market Failures: Financial instability is often caused by the people who run the markets themselves. People become a bit overconfident in businesses, in their ability to invest in a market, and take more risks. 
  • Policy Failures: The market’s financial instruments have become complex and people simply don’t understand what the risk factors are. Couple this with short-sighted policy changes and you have a recipe for disaster. 
  • Structural Changes in the Global Economy.
  • Political Instability and unstable government.

How to be prepared for an economic crash as an individual

We as individuals will see an economic crisis at some point in the future. It’s extremely difficult to actually predict when, but it is highly likely. 

  • Dollar-cost averaging put in a specific amount of money into the markets on a monthly basis. The goal here is to buy low and sell high. 
  • Risk tolerance capability: The financial advisors over at https://www.wealthry.com/ suggest that you should balance your portfolio with age. As you get older, you might not be able to handle as much risk as you could when you were younger. 
  • Preserve some physical assets or precious metals like gold and diamonds that can help you when you experience serious hardship.

Financial Crisis and Developing Countries

Financial uncertainty and instability in developed nations directly affect developing countries. Developing countries face problems like the high cost of fuel and rising food prices as they are dependent on the import or export of commodities.

Many Asian countries have suffered a decrease in their stock market indexes and in the value of their currencies. The slowdown in the advanced economies can also increase the chances of an economic crisis in Asian countries, too, as Asian products and services are sold globally.

Policies for Financial Recovery and Sustainable Development

The government should start with the implementation of simplified macroeconomic policies and bank support plans to promote financial recovery and stability. Economic, monetary, and fiscal policies should be introduced or reformed, with the aim of ensuring sustainable growth and development to prevent or break the cyclic crisis process. Sustainable growth, in this context, refers to being able to expand without creating problems for the future.

How a Country Can Handle an Economic Crisis

A financial crisis in a single country can lead to a crisis in other countries. Sometimes there is a domino effect which spans the globe. 

Some of the measures that a country can take to handle an economic crisis are:

  • The government should focus on the creation of stimulus packages to boost the economy or to prevent a recession by increasing employment and spending.
  • The government can create public works programs during a crisis to maintain employment levels and kickstart the economy.
  • The government should focus on the proper regulation of the rules and policies throughout the country. Policies should be as straightforward as possible; i.e., not complex.. 
  • The country’s policies should support large finance companies and the whole banking system. 
  • There should be good governance, with a strong push toward political stability. 

More Comprehensive Regulation and Reforms of the International Financial System

This involves the international banking and finance sectors for the reformation of global financial organizations. Some portion of the reform plan includes providing more support and power to developing countries. However, the advanced economies are resisting this meaningful effort.

The advanced economies should start to revise and work on how to correctly reform the banking and finance system so that not only they themselves can use the international policies that are more relevant to their situations. It must be relevant to all countries.

The length of today’s financial crises and their severity are partly due to a lack of confidence in the soundness of the financial system. For an economy to recover and start thriving again, businesses and individuals need to feel confident about investment and spending strategies. If that overall confidence is not there, many of the policymakers’ strategies could be in vain. There are two main types of confidence in an economy, business and consumer confidence.

______________________________________________________

Interesting related articles:

  • “ What is a Recession? “
  • “ What is a Depression? “

Share this:

  • Renewable Energy
  • Artificial Intelligence
  • 3D Printing
  • Financial Glossary

December 1, 2008

How to Fix the U.S. Financial Crisis

By Jeffrey D. Sachs

Jeffery D. Sachs

Editor's Note: This "Sustainable Developments " column will be printed in the December 2008 issue of Scientific American.

The origin of the U.S. financial crisis is that commercial banks and investment banks lent vast sums—trillions of dollars—for housing purchases and consumer loans to borrowers ill-equipped to repay. The easy lending pushed up housing prices around the U.S., which then ratcheted still higher when speculators bought houses on the expectation of yet further price increases. When the easy lending slowed and then stopped during 2006-07, the housing prices peaked and began to fall. The housing boom began to unravel and now threatens an economy-wide bust.

The U.S. economy faces four cascading threats: First, the sharp decline in consumer spending on houses, autos and other durables, following the sharp decline in lending to households, will cause a recession as construction of new houses and production of consumer durables nosedive. Second, many homeowners will default on their mortgage payments and consumer loans, especially as house values fall below the mortgage values. Third, the banking sector will cut back sharply on its lending in line with the fall in its capital following the write-off of bad mortgage and consumer loans. Those capital losses will push still more financial institutions into bankruptcy or forced mergers with stronger banks. Fourth, the retrenchment of lending now threatens even the shortest-term loans, which banks and other institutions lend to each other for working capital. Interbank loans and other commercial paper are extremely hard to place.

On supporting science journalism

If you're enjoying this article, consider supporting our award-winning journalism by subscribing . By purchasing a subscription you are helping to ensure the future of impactful stories about the discoveries and ideas shaping our world today.

The gravest risks to the economy come back to front. The fourth threat is by far the worst. If the short-term commercial paper and money markets were to break down, the economy could go into a severe collapse because solvent and profitable businesses would be unable to attract working capital. Unemployment, now at 6 percent of the labor force, could soar to more than 10 percent. That kind of liquidity collapse was the basic reason why Asian national incomes declined by around 10 percent between 1997 and 1998, and why the U.S. economy fell by around 25 percent during the Great Depression.

The third threat, the serious impairment of bank capital as banks write off their bad loans, could cause a severe recession, but not a depression. Unemployment might rise, for example, up to 10 percent, which would create enormous social hardships. The ongoing fall in bank capital as the housing boom turns to bust is already forcing banks to cut back their outstanding loans significantly, because they must keep the lending in proportion to their now-shrunken capital base. Major investment projects, such as acquisition of new buildings and major machinery, are being scaled back. Some major nonfinancial companies will likely go bankrupt as well.

The second threat, the financial distress of homeowners, will certainly be painful for millions of households, especially the ones that borrowed heavily in recent years. Many will lose their homes; some will be pushed into bankruptcy. Some may see their credit terms eased in renegotiations with their banks. Consumers as a group will start to become net savers again after years of heavy net borrowing. That trend will not be bad in the long term but will be painful in the short run.

The first threat, the cutback in sales of housing and other consumer durables, is the Humpty-Dumpty of the economy that cannot be put back together. The inventory of unsold homes is now large; housing demand and new construction will be low for many years. Consumer spending on appliances and autos is also plummeting. All these consequences are largely unavoidable and will force the U.S. into at least a modest recession, with unemployment likely to rise temporarily to perhaps 8 percent.

The goal of any new policy cannot be to prevent a recession. It's too late to stop such a downturn. The goal cannot be to save every bank. The U.S. economy has built up too many imbalances—consumer debt, overextended construction, impaired capital of banks—to avoid an economic downturn and a major retrenchment of the banking sector. The goal must be to avoid an outright collapse or deep recession. Two actions are therefore critical, and two more are subsidiary but still important.

Most important, the government and Federal Reserve Board must prevent the collapse of working capital by supplying short-term loans and taking other measures to sustain the commercial paper market, interbank lending and the smooth functioning of money market funds. They have the instruments to do so, and should use them aggressively. The government should also aggressively promote a recapitalization of the banking system so that bank lending is not squeezed for years to come. It can directly inject some public capital into banks, and can both pressure and entice the banks to raise additional private capital. Unfortunately, the $700-billion bailout nearing approval in Congress does not focus adequately on those liquidity or recapitalization challenges.
The legislation is better than nothing (to help forestall panic) but the real work of stabilizing and recapitalizing the banking system will now await the next administration, and the Federal Reserve will need to stay aggressive in preventing a liquidity collapse."

Two additional steps will be useful. The first will be to ease the repayment terms on existing mortgage holders, to reduce the flood of defaults and foreclosures that will otherwise occur. The second is to encourage expansionary monetary and fiscal policies abroad (most notably in cash-rich Asia), so that the decline in U.S. consumer spending is smoothly offset by a rise in spending in other countries. This overseas expansion would allow the U.S. to offset the fall in housing construction by a rise in exports, and would allow other countries to offset the fall in their exports to the U.S. by a rise in their internal demand. All these steps will have to await the next administration.

Search Results

How to deal with the global financial crisis and promote the economy’s recovery and sustained growth

Speech by lucas papademos, vice president of the ecbat the 7th european business summit organised by the european business forum brussels, 26 march 2009, i. introduction.

The European and global economies are experiencing the most severe and prolonged financial crisis since the 1930s. A few facts and figures highlight the magnitude and nature of the challenge we face. Since the beginning of the financial turbulence in 2007, the total reported write-downs and losses of banks globally have exceeded 888 billion dollars. Some estimates of the overall expected losses by banks and other financial institutions are in the range of 2.2 trillion dollars. [ 1 ] Asset prices have plummeted worldwide, though the extent differs across countries and market segments. In the EU, the value of equity has fallen by 6 trillion euro, [ 2 ] a decline of more than 50% from the peak reached in summer 2007. Economic activity decelerated sharply during 2008, especially in the last quarter; it is projected to contract significantly in the EU this year and to recover very moderately and gradually in the course of 2010. Importantly, the economic outlook is surrounded by exceptionally high uncertainty reflecting, among other factors, the low level of consumer and business confidence as well as the ongoing deleveraging of banks and other financial institutions.

The economic and financial situation and prospects are characterised by two features: first , a synchronised decline or deceleration in economic activity in all economies which is associated with a collapse in world trade; and, second , growing signs of an adverse feedback loop between the real economy and the financial sector. Although the sharp drop in the value of toxic assets has weakened many banks’ balance sheets, the weakening of economic activity has been impairing the quality of bank loans, adversely affecting their capital positions and their willingness to extend credit to the private sector. This, in turn, constrains the pace of economic activity and the ability of the private sector to service its debts, entailing a risk of a vicious circle.

II. Policies for economic recovery and sustained growth

These observations have two general implications for economic policy. First , the economy’s recovery requires the simultaneous implementation of macroeconomic policies to stimulate aggregate demand and of measures that will help repair banks’ balance sheets and encourage the provision of credit to the economy. In this way, a potential vicious circle can be prevented. Second , concerted policy efforts in all economies, especially the large ones, are necessary so that world trade can be revitalised and financial capital flows stabilised. This will help support the emerging market economies and global growth. The policy strategies pursued need not be identical across countries and regions and the required size of the economic stimulus and the nature of the other measures taken need not – and should not – be the same, as structural and conjunctural conditions differ. Nevertheless, a similar orientation and consistency is warranted.

Since the intensification of the financial crisis in September 2008, central banks and governments globally have acted in a decisive and concerted manner to contain the adverse effect of the financial crisis on the real economy and promote its recovery. In the euro area, the actions taken by the ECB and the Eurosystem are unprecedented in size and scope. Government support for financial institutions in the form of recapitalisations, guarantees on bank debt and, more recently, asset relief schemes, have been significant and the pertinent measures are progressively being implemented. And the fiscal stimulus packages of euro area governments are substantial, amounting to a total of about 2% of euro area GDP over this year and the next.

The immediate priority of macroeconomic policies and bank support schemes is to promote the economy’s recovery and preserve price and financial stability. Yet, a fundamental policy objective should be that the recovery of activity and the repair of the financial system have to be achieved in a manner that will ensure a sustained growth performance and will prevent the recurrence of episodes of financial imbalances and market excesses that can threaten again financial stability and economic welfare. Put differently, it is important that the policies and reforms pursued today lay the foundations for sustained growth. Let me now elaborate on these issues by focusing on the role and contribution of central bank policy and of financial system reform.

Central bank policy

The ECB’s monetary policy and provision of liquidity have played a key role in containing the downside risks to price stability, supporting economic activity and stabilising the financial system. The extent of the monetary policy easing since last October has been unprecedented, with key ECB policy interest rates having been reduced by 275 basis points. At the same time, money market rates have declined even more from the peaks reached in October 2008 as a result of the reduction in the policy rates and the provision of unlimited liquidity to banks at a fixed interest rate (against an expanded range of eligible collateral) since last October. At present, Euribor rates of maturities up to three months are below or very close to the main refinancing rate (MRO) of the ECB and at historically low levels – ranging between 0.93% (overnight) and 1.56% (3 months). [ 3 ] And these levels are comparable to the corresponding Libor rates in the US dollar and Pound sterling money markets. [ 4 ] Thus, over the past six months, conditions in the euro area money markets have significantly improved and effectively are similar to – or even better than – those in other major money markets.

In addition, the provision of liquidity by the ECB to the euro area banking system has been extraordinary in size and scope. The size of Eurosystem’s balance sheet in mid-February had reached 1.53 trillion euro (or 1.96 trillion US dollars), compared with 0.91 trillion euro before the eruption of the crisis. The expansion of the Eurosystem’s balance sheet by about 70% over this period reflects the various non-standard measures implemented by the ECB, including the provision of unlimited funding in euro at fixed interest rates over periods up to six months as well as the supply of liquidity in other currencies, notably US dollars, on the basis of a swap agreement with the Federal Reserve. The reduction in the policy rates and the increased supply of reserves were fully in line with the ECB’s primary objective of preserving price stability over the medium term, as inflation pressures eased and inflation risks diminished, and helped to alleviate pressures in the credit market and mitigate financial stability risks.

Nevertheless, and although bank lending rates have been gradually falling, bank credit standards on new loans have been tightened and credit growth to the private sector has been decelerating. This partly reflects the impact of the decline in economic activity on the demand for bank loans, but it is also a consequence of the ongoing deleveraging process in the banking system and continued stresses in the funding markets.

Government support for the banking system

Since last autumn, governments have supported the banking system through various measures: by injecting new capital, by providing guarantees on new bank debt issuance and, more recently, through asset relief schemes (involving the removal of impaired assets from the banks’ balance sheets or the provision of guarantees to limit the valuation losses of such assets). These measures have succeeded in stabilising the banking system, by reducing systemic risks and strengthening confidence. The support provided has been substantial, for example banks in the euro area have received 115 billion euro of capital injection from governments (of which 75 billion euro were provided to the major banking groups) and 217 billion euro of funding guarantees. However, these bank support measures are taking some time to implement. So far, only one third of the commitments for capital injections have been used and a smaller fraction – about 12% – of the commitments to guarantee new bank debt have been called upon. The participation of banks in the debt guarantee schemes is voluntary, and the very limited use of these guarantees may reflect a decline in the demand for credit and/or the desire of the banks to continue deleveraging their balance sheets. It is, however, important to ensure that other constraining factors are addressed, for example that the disincentives associated with the provision or pricing of these debt guarantees are promptly addressed, so as to help banks finance additional lending to the private sector.

Possible further measures

A relevant question is whether the tight financing conditions and the continuing stresses on the banking system require further measures by governments and central banks in order to help revive the extension of bank credit to the economy. The answer regarding the need and the nature of potential further measures depends on the causes or determinants of the prevailing financing conditions and on the structure of the financial system. To the extent that (i) financial market stresses, (ii) the deleveraging process, (iii) uncertainty about the economic outlook and about potential further bank losses, and (iv)  low confidence impair the functioning of the credit and bank funding markets and the transmission of the effects of monetary policy, “non-standard” measures aimed at reducing funding uncertainty and enhancing the functioning of the credit market and, consequently, the monetary policy transmission mechanism, may represent possible courses of action. In the euro area, because the banking system has a more dominant role in the financing of the private sector than the capital market, compared with other economies, the implementation of such measures would be more focused on the banking system. Potential measures could include an extension of the maturity of the central bank liquidity provided to banks and purchases of private debt securities in the secondary market in order to improve its liquidity and reduce the cost of funding of the real economy, thus helping its recovery.

Could a further easing of monetary policy contribute to containing potential disinflation risks and provide further support to economic activity? I would like to make two general remarks concerning the role of monetary policy in fostering the economy’s recovery and sustained growth at this juncture and more generally. First , as we have emphasised in the past, the ECB’s monetary policy should ensure that inflation expectations over the medium to longer term remain firmly anchored in line with the Governing Council’s aim to keeping inflation below, but close to, 2%. This anchoring of inflation expectations supports sustainable growth, employment creation and contributes to financial stability. Second, the monetary policy stance should be determined so as to also contribute to a smooth exit strategy from the current exceptional circumstances of historically low rates and unlimited provision of central bank money to the banking system. Consequently, a monetary policy that aims to address potential disinflation risks and maintain medium-term price stability must be implemented in a manner that also ensures the preservation of price stability over the longer term.

Financial system reform

And this brings me to two final points concerning two other essential conditions for sustainable growth: financial system reform and sound fiscal policy. It is by now generally agreed that there is both a great and urgent need to introduce reforms that prevent the recurrence of episodes of financial market excesses and corrections and that will make the global financial system more resilient to shocks. An extensive and impressive amount of work has been undertaken by national authorities and international bodies, under the auspices of the Financial Stability Forum and, more recently, the G20 process. Concrete proposals have been formulated – and others are currently being elaborated – on how to reduce the cyclicality of the financial system through various measures and reforms, including the enhancement of the scope and effectiveness of financial regulation and supervision. In the EU, the report of the de Larosière Group is a valuable contribution to this end. The forthcoming summit meeting of the Group of 20 in London can mark a further important step in the effective pursuit of this reform agenda globally. The prompt implementation of the proposed financial reforms will not only foster sustainable growth and financial stability in the long run, but it should also contribute to boosting confidence in the financial system in the short run, thus promoting economic recovery.

Fiscal policy

Last, and definitely not least, it is also essential for sustainable growth and prosperity that confidence in the long-term soundness of public finances is maintained. Government deficits and public debts are rising substantially in most countries as a result of the economic downturn, discretionary measures to stimulate the economy, and the funding of the bank support schemes. This is partly inevitable – due to the downturn – and partly necessary – to help stabilise the economy and the financial system – in the short run. But it is also imperative that fiscal policies are designed and implemented in a manner that strikes the right balance between the need to support the economy’s recovery and the need to preserve the confidence in the soundness and sustainability of public finances which is key for the long-term performance of the economy.

III. Conclusion

I have used the word ‘confidence’ several times. The severity and duration of the current economic and financial crisis is partly a consequence of the reduced confidence in the prospects of the economy and the soundness of the financial system. The recovery of the economy also hinges on the restoration of consumer and business confidence that can contribute to the revival of spending and investment, and the return to normality in financial markets and the banking system. The rebuilding of trust will depend on our ability to appropriately combine the policy actions needed to address the immediate challenges with the necessary reforms for establishing an economic, financial and institutional environment that is conducive to sustainable long-term growth.

Thank you very much for your attention.

[1] See International Monetary Fund, Global Financial Stability Report Market Update, 28 January 2009, p.2.

[2] Based on data available up for January 2009.

[3] Euribor rates for longer maturities (on 25 January 2009) are following: 6 months: 1.71%; 9 months: 1.78%; 1 year: 1.86%.

[4] US Dollar 3-months Libor on 25 January 2009 were 1.48%; and Sterling 3-months Libor 1.79%.

European Central Bank

Directorate general communications.

Reproduction is permitted provided that the source is acknowledged.

Our website uses cookies

We are always working to improve this website for our users. To do this, we use the anonymous data provided by cookies. Learn more about how we use cookies

We have updated our privacy policy

We are always working to improve this website for our users. To do this, we use the anonymous data provided by cookies. See what has changed in our privacy policy

Your cookie preference has expired

  • Search Search Please fill out this field.

1. Maximize Your Liquid Savings

2. make a budget.

  • 3. Minimize Your Monthly Bills

4. Closely Manage Your Bills

  • 5. Maximize Non-Cash Assets Value
  • 6. Pay Down Credit Card Debt

7. Get a Better Credit Card Deal

  • 8. Earn Extra Cash

9. Check Your Insurance Coverage

  • 10. Routine Maintenance

The Bottom Line

  • Lifestyle Advice

10 Ways to Prepare for a Personal Financial Crisis

Learn how to turn potential financial tragedy into a temporary setback

Amy Fontinelle has more than 15 years of experience covering personal finance, corporate finance and investing.

how to solve financial crisis in a country

The thought of being hit with a major negative event that could affect your finances, such as a job loss, an illness, a car accident—or a pandemic—can keep anyone awake at night. However, the prospect of something expensive and beyond your control happening becomes less threatening if you’re properly prepared. Here are 10 steps for how to deal with an economic crisis.

Key Takeaways

  • Having a monthly budget is essential to keeping track of your financial health.
  • Scrutinize your bills to see where you might be spending money you don’t have to spend and pay them on time.
  • Make it a priority to pay down your credit card debt and look for cards with low interest rates.
  • Do the proper maintenance on everything from your home to your health to avoid expensive problems down the road.

Cash accounts, such as checking, savings, and money market accounts—as well as certificates of deposit (CDs) and short-term government investments—will help you the most in a crisis. You’ll want to turn to these resources first because their value doesn’t fluctuate with market conditions, unlike stocks, index funds , exchange-traded funds (ETFs) , and other financial instruments in which you might have invested.

This means you can take your money out at any time without incurring a financial loss. Also, unlike retirement accounts, you won’t face early withdrawal penalties or incur tax penalties when you withdraw your money, except for CDs, which usually require you to forfeit some of the interest you’ve earned if you close them early.

Don’t invest in stocks or other higher-risk investments until you have several months’ worth of cash in liquid accounts. How many months’ worth of cash do you need? It depends on your financial obligations and risk tolerance .

If you have a major obligation, such as a mortgage or a child’s ongoing tuition payments, you might want to have more months’ worth of expenses saved up than if you’re single and renting an apartment. A three-month expense cushion is considered a bare minimum, but some folks like to keep six months or even up to two years’ worth of expenses in liquid savings to guard against a long bout of unemployment.

If you don’t know exactly how much money you have coming in and going out each month, you won’t know how much money you need for your emergency fund . And if you aren’t keeping a budget, you also have no idea whether you’re currently living below your means or overextending yourself. A budget is not a parent—it can’t and won’t force you to change your behavior—but it is a useful tool that can help you decide if you’re happy with where your money is going and where you stand financially.

3. Prepare to Minimize Your Monthly Bills

You might not have to do it now, but be ready to start cutting out anything that is not a necessity. If you can get your recurring monthly expenses as low as they can be, you’ll have less difficulty paying your bills when money is tight.

Start by looking at your budget to see where you might currently be spending more money than necessary. For example, are you paying a monthly fee for your checking account? Explore how to switch to a bank that offers free checking . Are you paying $40 a month for a landline you rarely use? Learn how you might cancel it or switch to a lower rate emergency-only plan. You might find ways you can start cutting your costs now just to save money.

Maybe you're in the habit of letting the heater or air conditioner run when you’re not home or leaving lights on in rooms you aren’t using. You may be able to trim your utility bills. Now might also be a good time to shop around for lower insurance rates and find out if you can cancel certain types of insurance, such as car insurance, in the event of an emergency. Some insurance companies might give you an extension, so look for the steps involved and be prepared.

There’s no reason to waste money on late fees or finance charges, yet families do it all the time. During a job loss crisis, you should be extra studious in this area. Simply being organized can save you a lot of money when it comes to your monthly bills. One late credit card payment per month could set you back $300 over the course of a year. It could even get your card canceled at a time when you might need it as a last resort.

Set a date twice a month to review all your accounts, so you don’t miss any due dates. Schedule electronic payments or mail checks so that your payment arrives several days before it’s due. This way, if a delay occurs, your payment will probably still arrive on time. If you’re having trouble keeping track of all your accounts, start compiling a list. When your list is complete, you can use it to make sure you’re on top of all your accounts and to see if there are any you can combine or close.

Don’t neglect your non-cash assets, such as frequent flier miles, credit card rewards points, and gift cards.

5. Take Stock of Your Non-Cash Assets and Maximize Their Value

Being prepared might include identifying all of your options. Do you have frequent flyer miles you can use if you need to travel? Do you have extra food in your house that you can plan meals around to lower your grocery bills? Do you have any gift cards you can put toward entertainment or sell for cash? Do you have rewards from a credit card that you can convert to gift cards? All these assets can help you lower your monthly expenses, but only if you know what you have and use it wisely. Knowing what you have can also prevent you from buying things you don’t need.

6. Pay Down Your Credit Card Debt

If you have credit card debt, the interest charges you’re paying every month probably take up a significant portion of your monthly budget. If you make it a point to pay down your credit card debt, you will reduce your monthly financial obligations and put yourself in a position to start building a better nest egg. Getting rid of interest payments frees you to put your money toward more important things.

If you’re currently carrying a balance, it could really help you to transfer that balance to another card with a lower rate . Paying less interest means that you can pay off your total debt faster and/or gain some breathing room in your monthly budget. Just make sure that what you save from the lower interest rate is greater than the balance transfer fee. If you’re transferring your balance to a new card with a low introductory annual percentage rate (APR) , aim to pay off your balance during the introductory period, before your rate goes up.

It's also worth asking if your current credit card company will lower your monthly interest rate. Sometimes companies will do this to keep you as a customer; it's cheaper for them to keep an existing customer than it is to recruit a new one.

There are always ways for you to earn extra money, whether it’s selling unneeded possessions, freelancing in your off hours, or even getting a second job.

8. Look for Ways to Earn Extra Cash

Everyone has something they can do to earn extra money , whether it’s selling possessions you no longer use (either online or in a garage sale), babysitting, chasing credit card and bank account opening bonuses, freelancing, or getting a second job. The money you earn from these activities may seem insignificant compared to what you earn at your primary job, but even small amounts can add up to something meaningful over time. Besides, many of these activities have side benefits: You might end up with a less cluttered house or discover that you enjoy your side job enough to make it your career.

In step three, we recommended shopping around for lower insurance rates. If you’re carrying too much insurance—or could be getting the same coverage from another provider for a better price—these are obvious changes you can make to lower your monthly bills.

That being said, having excellent insurance coverage can prevent one crisis from piling on top of another. It’s also worth making sure that you have the coverage you really need and not just a bare minimum. This applies to policies you already have, as well as to policies you may need to purchase. A disability insurance policy can be indispensable if you sustain a significant illness or an injury that prevents you from working, and an umbrella policy can provide coverage where your other policies fall short.

10. Keep Up With Routine Maintenance

If you keep the components of your car, home, and physical health in top condition, you can catch problems while they’re small and avoid expensive repairs and medical bills later. It’s cheaper to have a cavity filled than to get a root canal, easier to replace a couple of pieces of wood than to have your house tented for termites, and better to eat healthy and exercise than end up needing expensive treatments for diabetes or heart disease. You might think you don’t have the time or money to deal with these things on a regular basis, but they can create much larger disruptions of your time and finances if you ignore them.

Life is unpredictable, but if there’s anything you can do to stave off disaster, it’s to be prepared and careful. With the right preparation, you can turn a potential financial tragedy into a merely temporary setback.

  • Guide to Emergency-Proofing Your Finances 1 of 23
  • 10 Ways to Prepare for a Personal Financial Crisis 2 of 23
  • Stock Market Down? One Thing Never to Do 3 of 23
  • 5 Rules to Improve Your Financial Health 4 of 23
  • How to Reach Financial Freedom: 12 Habits to Get You There 5 of 23
  • Emergency Fund 6 of 23
  • How to Build an Emergency Fund 7 of 23
  • How to Invest Your Emergency Fund for Liquidity 8 of 23
  • 7 Smart Ways to Raise Cash Fast 9 of 23
  • How Much Cash Should I Keep in the Bank? 10 of 23
  • 7 Places to Keep Your Money 11 of 23
  • What Are the Withdrawal Limits for Savings Accounts? 12 of 23
  • Safe Deposit Boxes: Store This, Not That 13 of 23
  • The Financial Effects of a Natural Disaster 14 of 23
  • Disaster Loss: What It Is, How It Works, Calculation 15 of 23
  • If Your Kid Is 18, You Need These Documents 16 of 23
  • Power of Attorney: When You Need One 17 of 23
  • Financial vs. Medical Power of Attorney: What’s the Difference? 18 of 23
  • What Is a Special Power of Attorney vs. Other Powers of Attorney 19 of 23
  • What's the Average Cost of Making a Will? 20 of 23
  • 6 Estate Planning Must-Haves 21 of 23
  • Letter of Instruction: Don't Leave Life Without One 22 of 23
  • 5 Things to Consider Before Becoming an Estate Executor 23 of 23

how to solve financial crisis in a country

  • Terms of Service
  • Editorial Policy
  • Privacy Policy
  • Your Privacy Choices

Are Developing Countries Facing a Possible Debt Crisis?

Mark Twain is reputed to have said, “History doesn’t repeat itself, but it often rhymes.” There is little evidence that Mark Twain ever made this remark . Over the past year, observers of monetary policy have been wondering whether the current tightening cycle rhymes with Paul Volcker’s monetary policy tightening of the early 1980s. Paul Volcker was chair of the Federal Reserve from 1979 to 1987.

There are certainly some striking similarities. Both episodes were preceded by supply shocks and sharp increases in the prices of many commodities, such as oil. Both times, this led to a rise in U.S. inflation and a corresponding sharp tightening of monetary policy. But whereas in the 1980s this was followed by a sharp recession and a financial crisis in the savings and loan industry, no recession has emerged this time around, and the financial system has remained sound and resilient, notwithstanding a small number of highly publicized bank failures.

In this blog post, we examine whether another aspect of the 1980s—a debt crisis that affected many developing country borrowers—will be repeated in the 2020s. We review a few indicators that economists and policymakers often look at when assessing the likelihood of debt repayment difficulties, or debt distress, and show that they are currently at elevated levels. We conclude with some brief remarks on differences between the 1980s and today that should insulate the U.S. economy from the fallout if a debt crisis were to occur among developing countries.

Bond Spreads as a Measure of Distress

When a country faces debt repayment difficulties, it will sometimes fail to make scheduled principal and interest payments on its debts. This is a default on its debt obligations, and creditors typically have little in the way of legal recourse. Other times, a country will approach its creditors and ask them to accept a reduction or rescheduling of contracted payments. In either case, creditors lose some of the value of their investments.

As a result, debt repayment difficulties lead investors to reduce the prices they are willing to pay to purchase a country’s debts or, equivalently, to increase the interest rate required to compensate them for the greater risk of loss. Currently, interest rates are rising globally as monetary policy tightens, and so, to extract a measure of investor assessments of debt payment difficulties, we must look at the difference or spread between interest rates on the debts of a risky country, such as Lebanon or Argentina, and those paid by a country that is not expected to default, such as the U.S. or Germany.

J.P. Morgan constructs measures of these spreads against comparable U.S. government-issued notes and bonds for a set of emerging market economies that issue significant amounts of debt. For a country to be included in the J.P. Morgan EMBI Global Index, the country’s gross national income (GNI) per capita must be below the index income ceiling for three consecutive years, which is defined as the GNI per capita level that is adjusted every year by the growth rate of the world GNI per capita. For a country’s instruments to be included, they must have at least US$500 million outstanding, at least 2.5 years until maturity initially, and at least one year until maturity left; these can include loans, Brady bonds and Eurobonds. The country must also have daily available pricing from a third-party valuation vender. Over time, there have been 70 countries in this index. We will say that a country is in debt distress if its spreads exceed a conventional, but somewhat arbitrary, threshold of 1,000 basis points (10 percentage points).

The first figure below plots the number of countries in debt distress from the start of 2010 to July 2023. It shows that the number of emerging markets in debt distress spiked significantly to 15 at the beginning of the COVID‑19 pandemic, before reaching their highest levels (22) in the summer of 2022. They remain highly elevated today, with 16 emerging markets considered to be in debt distress. This amounts to 23% of the countries that make up the index.

The Number of Countries in Debt Distress Rose Sharply during the COVID-19 Pandemic

A line chart shows the number of countries under distress, as defined by the sovereign bond spread exceeding 1,000 basis points. The number goes from zero to eight from 2010 to 2019, then shoots up to 15 in March 2020. After declining to seven by May 2021, it again steadily rises to as high as 22 in July 2022. The number stood at 16 in July 2023.

SOURCES: J.P. Morgan, Bloomberg and authors’ calculations.

NOTE: This figure is constructed using the J.P. Morgan Emerging Markets Bond Index (EMBI) Global sovereign spreads. The data are monthly and correspond to the end of the month. We use a threshold of 1,000 basis points to indicate a country is in distress. Since 100 basis points is equivalent to 1 percentage point, this threshold can also be thought of as 10 percentage points.

As a measure of worldwide debt distress, these data have some limitations. First, the sample does not include any of the advanced economies that tend to issue the largest amounts of debt (although such countries, with a few notable exceptions such as those involved in the European debt crisis, tend to be of much lower risk of debt repayment difficulties). Second, the sample excludes countries that issue only modest amounts of privately traded debt (hence, making computation of spreads difficult), as well as those that typically borrow only from other governments and international organizations. For these latter countries, we need alternative measures of debt distress.

Credit Ratings as an Indicator of Distress

An alternative potential measure of current and future debt distress comes from country credit ratings produced by the major credit rating agencies S&P Global and Moody’s Investors Service. These ratings, provided as a service to investors, attempt to rate the risk of a future default (S&P) or the prospect of future investor losses (Moody’s).

Because ratings and spreads are intended to forecast default and investor losses, we should expect a close relationship between them. The figure below plots that relationship using ratings by S&P at the end of 2019, just prior to the onset of the COVID‑19 pandemic.

Developing Countries’ Sovereign Bond Spreads and Credit Ratings, December 2019

A scatter plot shows the EMBI sovereign spread for developing countries. Most of countries have spreads that are between 100 and 500 basis points, and most of the countries are rated between CCC+ and BBB.

SOURCES: J.P. Morgan, Bloomberg, S&P Global and authors’ calculations.

NOTES: The spread refers to the J.P. Morgan Emerging Markets Bond Index (EMBI) sovereign spread and reflects the last available data point in December 2019. Therefore, the credit rating reflects the same period. We omit Venezuela because it is an outlier; the country’s debt has a spread of about 15,000 basis points and a rating of selective default, or SD. In regard to countries with no rating (NR), we included only those who have had their ratings withdrawn.

As shown in this figure, there is a clear negative relationship, with lower credit ratings being associated with higher spreads. The relationship is nonlinear, with the relationship getting stronger for credit ratings below the investment grade cutoff (BBB-). The lowest rating that is considered investment grade by Standard & Poor’s is BBB-. For Moody’s, which uses a different scale, investment grade ratings are Baa3 and above. Importantly for our purposes, and in contrast to the spreads discussed previously, credit ratings are available for as many as 148 countries and have been produced since 1949, depending on the credit rating agency. S&P has produced sovereign ratings since 1949 and currently rates 148 countries, while Moody’s began these ratings in 1949 and currently rates 144 countries.

In interpreting changes in the distribution of credit ratings over time, we need to take into account that the number of rated countries has expanded chiefly through the award of ratings to countries with greater risks of investor losses. As shown in the figure below, S&P rated only seven countries in 1975, and all were rated as investment grade with almost all rated AAA. As the number of rated countries has grown, more and more have been rated at the lower rungs of investment grade, as well as increasingly below investment grade. This caveat should be taken into account when examining trends in credit ratings.

The Distribution of S&P Sovereign Ratings

A stacked chart shows the distribution of the S&P sovereign ratings from 1975 to 2023. In 1979, the dozen countries rated were all AAA. By 1999, of the 79 countries rated, almost all were rated at least B. By 2023, 143 were rated; though the vast majority were rated at least B, a growing share were rated CCC/CC and SD.

SOURCES: S&P Global and authors’ calculations.

NOTE: The credit rating for a specific country is the average credit rating over the year. We group “plus” and “minus” values with the letter that is associated with the rating.

To better gauge debt distress, we now focus on rates that meet or fall below S&P’s B- and Moody’s B3; both ratings are considered “highly speculative.” The figure below plots the number of countries rated in debt distress by each of the two major ratings agencies.

Rated Countries in Distress

A line chart shows the number of countries with sovereign debt rated 'highly speculative' or riskier either by S&P or by Moody's. The number rose from zero to 12 by 2005; it then declined slightly before rising again to 12 in 2009. After declining again, it began a steady rise, reaching as high as 42 in 2023.

SOURCES: Moody’s Investors Service, S&P Global and authors’ calculations.

NOTES: Debt distress is defined as a rating of B- or lower for S&P Global ratings, and B3 or lower for Moody’s ratings. Though the earliest sovereign rating appeared in 1949, we do not show data going back that far because the first credit rating that indicated debt distress appeared in 1996.

Using this definition results in 36 and 42 countries being classified as in debt distress today using S&P and Moody’s credit ratings, respectively, which is a significant increase from the levels at the end of 2019 prior to the pandemic. This means an additional 20 (S&P) and 26 (Moody’s) countries are identified as being in debt distress beyond the 16 identified from bond spread data.

Our credit ratings example paints a much wider picture of debt distress than the emerging market spreads studied earlier. Even so, there are many countries that do not have a credit rating. Often these are countries that are very poor or very small, so there is little chance that they would issue debt that is publicly traded among private investors.

World Bank and International Monetary Fund Debt Distress Ratings

The World Bank and International Monetary Fund (IMF) also produce ratings for International Development Association countries that are eligible under the Low-Income Country Debt Sustainability Framework; that is, countries that are low income and typically cannot tap international debt markets for funding. Rating levels include “in distress” as well as “high,” “moderate” and “low” risk of future debt distress as of the country’s last debt sustainability analysis, with ratings provided both for external debt (debt borrowed from international creditors) and for total debt including domestic debt.

There are currently 67 countries that are rated under this framework, with more than half of them (36) being classified as in distress or at high risk of future debt distress. Of the 67 countries, 33 are rated by the World Bank/IMF and not the credit rating agencies. This allows us to see and understand the capability of a different set of countries to repay their debt. Of the 33 countries rated by the World Bank/IMF and not the credit rating agencies, 23 of them are in distress or at high risk of future debt distress.

If we looked at only those rated by the credit rating agencies, we would miss the fact that more countries are in or close to being in debt distress. Different measures of debt distress allow us to gain more and different information about countries.

Risks Have Increased, but Possible Impact on U.S. Likely to Be Smaller

Does 2023 rhyme with the early 1980s? It certainly does insofar as the prospects a developing country debt crisis have increased. In the past few years, 11 countries have already defaulted, while another 48 (or 54, depending on the credit rating agency you use) are in or at high risk of debt distress, as shown by the combination of bond spreads, private credit rating agency assessments, and the World Bank and IMF designation for low-income countries. By way of comparison, at the height of the 1980s debt crisis, 58 countries were in default in the sense of having outstanding arrears owed to either official creditors or to private-sector banks and bondholders.

Episodes of debt distress are as likely as before to inflict economic hardship on the affected countries. Debt restructuring negotiations may also be more complicated this time because of the presence of new official creditors such as China and the Persian Gulf States, who are not members of the venerable Paris Club of official creditors. The Paris Club is a group of 22 countries serving to provide debt treatments to countries experiencing debt distress. The G20’s new unified framework for debt restructuring has also not been fully tested. The G20, a group of industrialized and developing countries, addresses major issues related to the global economy.

But viewed from the self-centered perspective of the U.S. economy, the consequences of such a debt crisis for the U.S. are likely to be far smaller. In the 1980s, the eight largest U.S. money center banks had exposures to developing countries on the order of 2.5 times the level of their capital, and they had set aside few reserves. Today, direct exposures to developing-country government debt among major banks appear quite limited. This is based on our examination of the annual reports of the top U.S. banks. By being less exposed, if there is a debt crisis, the U.S. should be directly impacted less than in the 1980s.

  • There is little evidence that Mark Twain ever made this remark .
  • Paul Volcker was chair of the Federal Reserve from 1979 to 1987.
  • For a country to be included in the J.P. Morgan EMBI Global Index, the country’s gross national income (GNI) per capita must be below the index income ceiling for three consecutive years, which is defined as the GNI per capita level that is adjusted every year by the growth rate of the world GNI per capita. For a country’s instruments to be included, they must have at least US$500 million outstanding, at least 2.5 years until maturity initially, and at least one year until maturity left; these can include loans, Brady bonds and Eurobonds. The country must also have daily available pricing from a third-party valuation vender. Over time, there have been 70 countries in this index.
  • The lowest rating that is considered investment grade by Standard & Poor’s is BBB-. For Moody’s, which uses a different scale, investment grade ratings are Baa3 and above.
  • S&P has produced sovereign ratings since 1949 and currently rates 148 countries, while Moody’s began these ratings in 1949 and currently rates 144 countries.
  • The Paris Club is a group of 22 countries serving to provide debt treatments to countries experiencing debt distress.
  • The G20, a group of industrialized and developing countries, addresses major issues related to the global economy.
  • This is based on our examination of the annual reports of the top U.S. banks.

Headshot of Mark J. Wright

Mark L.J. Wright is an economist and senior vice president at the Federal Reserve Bank of St. Louis. Read more about the author and his research .

Amy Smaldone

Amy Smaldone is a research associate at the Federal Reserve Bank of St. Louis.

Related Topics

This blog offers commentary, analysis and data from our economists and experts. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

Media questions

All other blog-related questions

Explainer-How Bad Is Pakistan's Debt Crisis and Can the IMF Save It?

Explainer-How Bad Is Pakistan's Debt Crisis and Can the IMF Save It?

Reuters

FILE PHOTO: People cover themselves to stay warm during heavy fog, early in the morning at the fruit wholesale market on the outskirts of Peshawar, Pakistan January 9, 2024. REUTERS/Fayaz Aziz/File Photo

LONDON (Reuters) - Negotiations on a new government in Pakistan have allayed immediate fears of instability in the nuclear-armed nation following inconclusive elections last week, but the risk of a full-scale economic crisis remains.

A $3 billion programme from the International Monetary Fund (IMF) runs out next month and securing a new and much bigger one is widely seen as the priority for the new administration.

WHO COULD THE IMF NEGOTIATE WITH?

The largest party, the Pakistan Muslim League-Nawaz (PML-N), secured support on Tuesday from the second biggest, the Pakistan People's Party (PPP), and is trying to persuade it to form a majority coalition.

The caretaker government in place since August is implementing the IMF loan programme which helped to avert a sovereign debt default when it was approved in July. Recent legislation allows it to make decisions on economic matters in the South Asian country as well as overseeing the election. It did not immediately respond to a request for comment on the prospects for a new IMF deal.

HOW BAD IS THE ECONOMIC SITUATION?

Pakistan's foreign exchange reserves stand at roughly $8 billion which barely covers two months of essential imports although it is an improvement from the $3.1 billion they were down to just over a year ago.

A $1 billion bond payment in two months' time will cut them further although the country is getting a $700 mln injection of already-approved IMF money too.

"It is imperative (to get into another IMF programme), given that Pakistan’s foreign exchange reserves are abysmally low compared to its large impending external debt repayment needs. Former deputy central bank governor Murtaza Syed said. "There is no alternative".

HOW MUCH DEBT IS THERE?

Pakistan's debt-to-GDP ratio is already above 70% and the IMF and credit ratings agencies estimate that the interest payments on its debt will soak up 50% and 60% of the government's revenues this year. That is the worst ratio of any sizable economy in the world.

Analyst firm Tellimer says the country's problem is primarily domestic debt, which comprises around 60% of its debt stock and 85% of its interest burden. Pakistan's external debt stock - denominated largely in dollars - is also heavily skewed towards bilateral and multilateral creditors, which comprise roughly 85% of the total.

Bonded debt comprises just 8% of the external debt stock and 3.4% of its total public debt. That is dwarfed by the near 13% of total debt that it owes to China which has lent to Pakistan money over the years for infrastructure projects and for other types of spending.

HOW IS IT AFFECTING THE POPULATION?

A combination of tax and gas tariff hikes and a steep fall in the rupee currency have pushed inflation up to nearly 30% year-on-year. It is expected to come down later in the year but will stay well above the central bank's 5-7% target for some time, economists forecast.

The rupee is expected to fall further too. For context, the implied exchange rate underlying the latest IMF staff report is 305 rupee to the dollar for this fiscal year and 331 per dollar in FY 24/25, levels which are roughly 8% and 15% weaker than the current exchange rate.

(Reporting by Marc Jones in LONDON and Ariba Shahid in KARACHI; editing by Philippa Fletcher)

Copyright 2024 Thomson Reuters .

Join the Conversation

Tags: Pakistan , Sri Lanka

how to solve financial crisis in a country

Health News Bulletin

Stay informed on the latest news on health and COVID-19 from the editors at U.S. News & World Report.

Sign in to manage your newsletters »

Sign up to receive the latest updates from U.S News & World Report and our trusted partners and sponsors. By clicking submit, you are agreeing to our Terms and Conditions & Privacy Policy .

You May Also Like

The 10 worst presidents.

U.S. News Staff Jan. 26, 2024

how to solve financial crisis in a country

Cartoons on President Donald Trump

Feb. 1, 2017, at 1:24 p.m.

how to solve financial crisis in a country

Photos: Obama Behind the Scenes

April 8, 2022

how to solve financial crisis in a country

Photos: Who Supports Joe Biden?

March 11, 2020

how to solve financial crisis in a country

Key Quotes From Engoron’s Trump Ruling

U.S. News Staff Feb. 16, 2024

how to solve financial crisis in a country

Judge Eviscerates Trump Business Empire

Lauren Camera Feb. 16, 2024

how to solve financial crisis in a country

Biden: Putin to Blame for Navalny Death

Susan Milligan Feb. 16, 2024

how to solve financial crisis in a country

A Guide to Trump’s Four Indictments

Lauren Camera and Kaia Hubbard Feb. 16, 2024

how to solve financial crisis in a country

Consumers Stay Optimistic on the Economy

Tim Smart Feb. 16, 2024

how to solve financial crisis in a country

Housing Market Hit by Bad Weather

how to solve financial crisis in a country

  • Search Menu
  • Conflict, Security, and Defence
  • East Asia and Pacific
  • Energy and Environment
  • Global Health and Development
  • International History
  • International Governance, Law, and Ethics
  • International Relations Theory
  • Middle East and North Africa
  • Political Economy and Economics
  • Russia and Eurasia
  • Sub-Saharan Africa
  • Advance Articles
  • Editor's Choice
  • Special Issues
  • Virtual Issues
  • Reading Lists
  • Archive Collections
  • Book Reviews
  • Author Guidelines
  • Submission Site
  • Open Access
  • Self-Archiving Policy
  • About International Affairs
  • About Chatham House
  • Editorial Board
  • Advertising & Corporate Services
  • Journals Career Network
  • Journals on Oxford Academic
  • Books on Oxford Academic

Article Contents

The great depression: the absence of coordination, the 1997 asia crisis: the failure of multilateralism, the great recession: the failure of fiscal coordination, we never learn, or at least we don't learn enough.

  • < Previous

How not to solve a financial crisis

This article is part of the International Affairs September 2022 special issue: ‘International relations: the “how not to” guide’, guest-edited by Daniel W. Drezner and Amrita Narlikar.

  • Article contents
  • Figures & tables
  • Supplementary Data

Harold James, How not to solve a financial crisis, International Affairs , Volume 98, Issue 5, September 2022, Pages 1575–1593, https://doi.org/10.1093/ia/iiac057

  • Permissions Icon Permissions

In what ways can there be a learning from the past in the case of financial crises? A short-run assessment looks frequently different to a longer retrospective: policies that once appeared to be the best available turn out to be counter-productive. The article tackles this issue by examining three iconic and world-changing cases of financial crisis: 1931, 1997 and 2008. In each, it looked at first as if there was a substantial success, because the measures adopted corresponded to conventional wisdom. But those immediate responses, in each case driven by the sense that past mistakes needed to be avoided, in the end unfortunately set the stage for a new set of problems, and thus for the next crisis. Even though multilateral solutions might have been the best answer, the concrete dynamics of responding to crises politically produces national solutions, which may drive a nationalization of politics. The immediate and conventional solutions did not adequately deal with the social and political fallout from increasing disillusion with the way that the solutions are applied, and with the (in part) unintended consequences they produce. The side-effects of anti-crisis medicine are thus unpleasant and liable to generate new tensions.

Financial crises are always unexpected, and yet they recur regularly. So maybe they are predictable? Or even avoidable? Couldn't people be more sensible about them, less initially caught up in pre-crisis euphoria, and then less stricken by post-crisis gloom in the messy aftermath of a problem? Why does the near-certainty that the next crisis will come not help policy-makers or the financial sector or the public to respond effectively? Hamlet observes resignedly: ‘There's a special providence in the fall of a sparrow. If it be now, ‘tis not to come. If it be not to come, it will be now. If it be not now, yet it will come—the readiness is all.’

The unexpected quality of financial crises arises in part from their varied and complex character. They inevitably produce multiple and often contradictory responses. There are analogies to medical treatments for the same ailment that often go in different directions: some physicians recommend doing nothing, others push for a variety of pharmaceutical options, others want surgery. The complexity increases further because of economic interconnections across borders, so that another country's solution may affect the outcome at home.

Hamlet's sparrow can fall in many different ways, and some people might even believe that the sparrow won't fall at all. It has become a cliché in commentary on financial crises to quote the famous opening of Tolstoy's Anna Karenina : ‘Happy families are all alike [but] every unhappy family is unhappy in its own way’. Crises have very different pathologies. That is why another key element of the standard financial response—learn from the past, learn from history—is often far from helpful. Readiness is not always heightened by focusing on one previous model.

Economic historians have a professional interest in giving advice about lessons from the past, and about the impact that memories can have on responses. 1 They often complain that contemporary responses are limited because those who make them do not have direct experience of the dramatic collapses of the past. 2 They warn that it is necessary to have a quick bundle of measures ready at hand, because there is ‘no time for reflection’ in the middle of a crisis: immediate action is required. 3 On the other hand, as is made clear in Barry Eichengreen's masterly analysis of the way in which the Great Depression lessons were used in the 2007 financial crisis, sticking-plaster solutions do not cure the fundamental problems: there is a need for ‘comprehensive reforms’ to remedy the ‘flawed monetary, fiscal, financial and social problems’. 4 That, however, requires a reordering, even a reinvention, of both the economy and politics; and it is not, then, surprising that many have concluded that only the utter destructiveness of the Second World War could destroy the interwar misincentives that had led to the Great Depression. 5

There are frequently constraints: limitations on what Knut Borchardt memorably termed ‘the room for policy manoeuvre’. 6 Over-indebted countries cannot easily just take up more debt to resolve a sudden shock. In consequence, there may be a need to take options that are known to be second best. W. A. Lewis, in his celebrated study of the Great Depression, considered the proclivity to impose tariffs and other measures of trade protection a bad but necessary response to externally imposed deflation. 7

Other contributions to this special issue make the point that a short-term assessment looks different from a longer retrospective. The three cases of financial crisis examined in this article, those beginning in 1931, 1997 and 2008, are iconic: in each, it looked at first as if there was a substantial success (often because the measure adopted corresponded to conventional wisdom). That was the appearance, too, when Neville Chamberlain triumphantly returned from Munich in September 1938, celebrating ‘peace in our time’. In 1931, after the failure of the Vienna-based Creditanstalt started the chain of financial contagion that would bring down Germany and then push Britain off the gold standard, US President Herbert Hoover pushed through a one-year moratorium on international debt and reparations payments. The move looked like good news to the US financial sector. Stocks rose on Wall Street, and the press initially celebrated ‘one of the most effective measures that could be taken to relieve international uncertainty and world depression’. 8 In 1997–8, when US policy-makers acted decisively in designing rescue packages for Asian and other countries in crisis, they were initially lauded as the Committee to Save the World. 9 In 2009, the London G20 summit was also supposed to have saved the world, and British Prime Minister Gordon Brown proudly claimed that he supplied the ‘“oxygen of confidence” to the global economy’. 10 It was not clear what exactly constituted saving the world.

Each of these moves, in each case driven by the sense that past mistakes needed to be avoided, in the end unfortunately set the stage for a new set of problems, and then the next crisis. In his disastrous press conference in August 2021 after the fall of Kabul, President Biden explained that he would not repeat the mistakes of the past. 11 Such determination turns out to be the way to make new and terrible mistakes. In short, in thinking about how to handle financial crisis, believing that you can simply learn from the last crisis turns out to be … how not to do it.

The twentieth century's collective memory is scarred by the interwar ‘Great Depression’—a slump that seemed to turn conventional economics upside down. Understanding what delivered the shock of the Great Depression has consequently become what Ben Bernanke memorably called the ‘holy grail’ of macroeconomics: but we know from medieval stories that the knights almost never succeed in their quest. 12 As Alfred Tennyson put it in ‘Sir Galahad:’ ‘O just and faithful knight of God! Ride on! the prize is near.’ (Sir Galahad, of course, doesn't find the grail.)

The moment that turned a major downturn into a worldwide slump—the Great Depression—was the failure in May 1931 of the Austrian Creditanstalt bank. That was the event Ben Bernanke thought about on the weekend of the 2008 Lehman Brothers collapse, when he weighed the grim historical parallels. 13 A failure of a very large bank in a very small country set off a wave of contagion, first affecting neighbouring Hungary (also relatively small), then Germany (large and very unstable), and then Great Britain, which in September 1931 abandoned its gold parity—the anchor of the international system. And then the contagious panic spread to the United States, and eventually, after the US too gave up on gold parity, to the last bastions of the old currency order: Belgium, France, the Netherlands and Switzerland.

The interwar slump was a worldwide phenomenon, but its effects varied enormously from country to country, as did the policy options—such as they were. It is difficult to imagine that there could be one answer. Looking at policy-making in some places is a matter only of analysing precisely why policy was restricted and baulked: that was the case in highly indebted countries, which faced only highly unattractive and politically unpleasant alternatives. 14 Devaluing the home currency in order to obtain export advantages (or demand from abroad) would only increase the burden of debt denominated in foreign currency, so that devaluations were inevitably followed by defaults; but that move would restrict the availability to finance trade, including essential imports. As a consequence, economic strategists in countries with impossible debt levels associated with UNECLA (the United Nations Economic Commission for Latin America, known in Spanish and Portuguese as CEPAL), concluded that only a longer-term strategy of development through import substitution offered a path to redemption. By raising the level of domestic demand, such a strategy would allow agricultural producers to escape from the trap of low commodity prices. Even where it looked as if there were more policy options, there were strong incentives to cut off links with an external system that imposed deflation and depression.

Britain, whose traditions of economic thinking would influence the world's debate on counter-crisis strategy, might appear to have had more options for tackling the economic dilemmas, but largely failed to realize the opportunity. The analysis that emerged triumphant from the depression and is associated forever with the Cambridge economist John Maynard Keynes reflected a very peculiar British material context. The country was in a long-term relative economic decline, and there were major structural problems before the worldwide slump hit. In the mid-1920s, over one and a quarter million workers were unemployed (out of a total workforce of almost twelve million insured); three-quarters of these were in the old staple industries, in particular cotton and woollen manufacturing. 15 Political leaders could not imagine any other solution than cost-cutting, in particular through wage reductions (rather than investment in increasing productivity). Prime Minister Stanley Baldwin, whose family were industrialists engaged in iron and steel production, explained in 1925 that ‘all the workers of this country have got to take reductions in wages to help put industry on its feet’. 16 The pressure was undoubtedly made worse by the choice of the exchange rate—the prewar rate—at which the government returned the country to the gold standard and gold convertibility in 1925, which produced a constant pressure to deflate. But it may have been a mistake, generated by the mentality of the time that sought a return to the apparent certainties of the prewar rate, even to choose any parity: the country was vulnerable to financial runs which were pushed by the easy target offered by a fixed exchange rate.

The UK thus looked and felt depressed in the 1920s—even before the slump. That was in remarkable contrast with the two other major industrial economies of the world, Germany and the United States: Germany experienced a boom in the later 1920s, driven by foreign borrowing on the promise of a better future, and dreamed of a rationalized technological future; 17 while the United States, which largely generated the financial exuberance that fed a world upswing, looked quite euphoric. The inflow of funds to Germany effectively allowed that country for the moment not to pay reparations, or at least to make no net transfer payments. 18 Japan, too, was building up a powerful and dynamic export industry. At the end of the 1920s, the Soviet Union looked to forced, breakneck industrialization as a way out of stagnation. In undynamic Britain, Keynes felt that he was offering not just solutions to a British malaise, but a policy framework that had a much wider, perhaps global, applicability. As he put it in a letter to George Bernard Shaw in 1935, on the eve of the publication of his masterwork The general theory of employment, interest and money , ‘I believe myself to be writing a book on economic theory which will largely revolutionize—not, I suppose, at once, but in the course of the next ten years, the way the world thinks about economic problems.’ 19 In short, he thought that a British problem required a global solution.

Could there have been a coordinated international effort to prevent, halt or reverse the collapse of demand? That would have required restarting the credit engine that was sputtering and dying in a world in which no one was any longer prepared to take on risk. Even Keynes was not so bold as to think that this was a realistic possibility. The two major surplus economies, France and the United States, appeared to have the only governments with any substantial room for manoeuvre. The United States made mistakes in monetary policy, famously analysed by Milton Friedman and Anna Schwartz, which had impacts on the rest of the world—but that was a world already gripped by depression. 20 Both France and the United States were paralysed. France was inhibited by the consciousness that the depression was making Europe more dangerous and threatening to itself, and by the fear that any international support that Paris might give would only strengthen France's enemies. 21 In consequence, it was unconstructive and hostile when faced with the initial events in the chain of contagion: the collapse in May 1931 of the Vienna Creditanstalt and the German banking crisis of July 1931. 22 The United States, for its part, was obsessed by the domestic consequences of the slump and saw bankers as an international profiteering interest group. Herbert Hoover's initiative in suspending reparation and war debt payments for one year as a response to the Austrian crisis and the threat of wider disruption was a classical instance of a small-scale solution that initially looked promising, but which participants quickly realized would do nothing to resolve the underlying problem. 23 The international rescue package coordinated by the Bank for International Settlements was also a textbook example of too little, too late. 24 These attempted counter-crisis measures only increased despondency about any cooperative solution.

Since international rescue operations were unviable or unsuccessful, the only alternative appeared to be a retreat to economic nationalism. Trade protection could be defended as a second-best policy: a mechanism to limit the contagious spread of monetary deflation emanating from a mixture of policy and the constraints of the gold standard. After the 1931 financial crises, countries moved much more radically to curtail foreign exposure, with more impositions of quantitative constraints (quotas) and a raising of tariffs. 25

Limiting flows of money was also attractive as an option, though the extent of the crisis had destroyed the prospect of any substantial new inflows to the debtor countries. So capital controls in practice restricted themselves to stopping outflows: to keeping borrowed money trapped in the now closed-off economy of the debtor.

Other aspects of globalization were on the wane, too. A limitation of population movements appeared to be a logical response to economic uncertainty, and had already been introduced systematically in many countries (including France and the United States) in the 1920s, before the depression. Anxieties associated with the slump merely intensified the pressure to control migration. 26

Was there any hope for multilateral solutions? The high point of international cooperation was supposed to be the 1933 World Economic Conference in London. 27 But its failure was almost predestined. Monetary experts argued that an agreement on currency stabilization would be highly desirable, but that it required a prior agreement on the dismantling of trade barriers—all the high tariffs and quotas that had been introduced in the course of the depression. Trade experts met in parallel and made the mirror image of this argument. They agreed that protectionism was an obvious and blatant vice, but thought that it was a necessary one that could not be addressed without monetary stability. Only leadership by a determined great power, prepared to sacrifice its particular national interests in order to break the resulting impasse, might conceivably have saved the meeting. But such leadership was unlikely. Governments were unwilling in times of great economic difficulty to make sacrifices that might entail a short-term cost. Even if the result would have been longer-term stability, the immediate political consequences were too unpleasant. In adverse economic circumstances, governments felt vulnerable and unsure, and they could not afford to alienate public support.

Realization of inevitable failure always prompts the search for a scapegoat. The 1933 World Economic Conference resembled a classic detective novel in which every party had a reason to be a suspect. Britain and France had turned away from internationalism, adopting trade systems known as ‘Imperial Preference’, which favoured their vast overseas empires. Germany's president had just appointed Adolf Hitler's radical and aggressive government. The German delegation was led by a right-wing demagogue, Alfred Hugenberg, who—though not a National Socialist—wanted to show that he was actually an even more implacable nationalist than Hitler himself. The Japanese government had just sent troops into Manchuria. Of all the major powers in London, the United States looked the most reasonable and internationalist by far. It had a new, charismatic president, who was known as an Anglophile and a cosmopolitan spirit. Franklin Roosevelt was already taking vigorous action against the depression in the United States, and was trying to reorder the failed US banking system. Roosevelt did not know what line to take at the conference, and his stream of advisers offered inconsistent counsel. At last, he lost patience and announced that for the moment the United States had no intention of stabilizing the dollar. This radio message, delivered on 3 July 1933, was known as ‘the bombshell’. Roosevelt talked about the need to restore ‘the sound internal economic system of a nation’, and condemned the ‘old fetishes of so-called international bankers’. 28

Everyone pretended to be shocked at the failure of internationalism. But, at the same time, they were delighted to have found someone who could be blamed for the failure of the conference. The collapse of the conference, and Roosevelt's ‘bombshell’, were emphatically welcomed by Keynes. On 4 July 1933, he published in the Daily Mail a celebratory article under the title ‘President Roosevelt is magnificently right’. 29 Keynes and Roosevelt became the makers of a new age of deglobalized politics.

The initial response of 1931, one of bungled and small-scale multilateralism, had not worked, and the demonstration effect of that failure prompted a relearning. The lesson learned was that purely national solutions work best and that some sort of national plan, with fiscal commitments, was required. But the Second World War made it clear that national solutions also increased international tensions, and that the breakdown of the international economy had been in part responsible for a vicious cycle of escalating nationalism. Subsequently, Keynes and Roosevelt both turned dramatically in the same direction: rather than resorting to the old globalization, they devised, at the 1944 Bretton Woods Conference, a set of rules that would allow the internationalization of both prosperity and peace. Roosevelt's Treasury Secretary, Henry Morgenthau, put the case very simply at Bretton Woods when he argued that peace and prosperity were indivisible. The outcome was a new confidence, which in the 1960s turned into overconfidence that crises could be avoided.

For Keynes, unconstrained or liberalized international capital flows had been a source of instability. After the retreat from Keynesianism in the 1970s, the easy availability of foreign capital looked like a welcome way of providing more resources and of stimulating growth and development. Capital mobility reappeared, and by the 1990s constituted a new threat. The wave of contagious crises that hit the world in 1997–8 looked like a repeat of the financial contagion of the early 1930s. The crisis countries—first Thailand, then Indonesia, South Korea, the Philippines, Malaysia, and finally Russia and Brazil as the crisis spread beyond east Asia—had little in common with each other, apart from a dependence on capital imports that suddenly shut down. 30

This time, in contrast to the early 1930s, everyone knew that a rescue was required and that there was a need for multilateralism; the dispute concerned who should provide it and on what (and whose) terms. Just before the outbreak of the Asia crisis, the United Sates had shut down a Japanese proposal for an Asian Monetary Fund: the argument was that rescues needed to be multilateral, carried out through the International Monetary Fund (IMF), with bilateral side agreements providing additional resources. But the rescue operations provided a bitter taste, just as the European rescue operations did after 2010: in both cases a continent became largely disillusioned with multilateralism as practised through international institutions.

The rescue operations produced apparently clear lessons for the victims of crisis. Asian countries felt that they had been let down by the international system. The IMF was accused of pushing for regime change—especially in Indonesia—and imposing political conditionality. The US administration had concluded that President Suharto could not do economic reform, was hopelessly corrupt and needed to be removed. 31 In many countries, big US banks were let in as part of a process of financial reform: the victims of crisis interpreted the move as western institutions acquiring valuable long-term assets at fire-sale prices. The conclusion was that it was important to self-insure, with an accumulation of high levels of reserves, so that in any future crisis there would be no dependence on the IMF. Those high reserves required large current-account surpluses, run over long periods of time, and they became viewed increasingly as a potential source of instability and destabilization.

In one other country, the politicization of coordinated rescue played out in a different way. Russia was generally thought to be ‘too nuclear’ to fail. In July 1998, it received a large IMF package, which most of the IMF staff felt (correctly) was destined to fail. The large-scale support was indeed wasted on propping up the Russian elite by allowing them to move out of roubles. The political pressure was immense. When the scepticism of the IMF professionals trickled through to the media, David Lipton, the under-secretary of the US Treasury for international affairs, telephoned the IMF's press office to demand that President Bill Clinton's support of the Russian government not be undercut. 32 The IMF programme simply allowed Russian elites to continue to change their roubles for foreign currency and escape before a simultaneous devaluation and debt default on 17 August. The lesson was learned, especially in south Asia: nuclear capacity increases bargaining power with international institutions. Technocrats in international institutions saw this danger, but the political considerations, expressed especially in pressure from the US government, led to a dangerous commingling of security and financial considerations.

The coordinated official responses to the 1997 crisis produced a new set of problems, in two ways: first, the buildup of currency reserves and balance of payments imbalances in Asia—most importantly in China, but also in Middle East oil-producing countries; and second, the buildup of nuclear reserves in countries that wanted to become too nuclear to fail, fuelling in particular the nuclear arms race between India and Pakistan. There was also a backlash against ‘excessive’ official conditionality, which was condemned as self-defeating by the crisis countries and as self-interested by the creditor countries. Countries that escaped the crisis by maintaining capital controls (China) or imposing new controls (Malaysia) appeared, respectively, to do much better than or at least as well as countries that had made themselves vulnerable to large and easily reversible capital inflows. A new scepticism about capital mobility appeared, and by the 2000s even the IMF began to reconsider its commitment to capital market liberalization.

The doubts about crisis management translated into a critique of the prevalent mode of international governance. The pushback targeted the idea of technocratic solutions imposed by well-connected financial experts. 33 In February 1999 Time magazine produced a famous cover story on US Secretary of the Treasury Robert Rubin, deputy secretary Larry Summers (later Secretary) and Federal Reserve Chairman Alan Greenspan, dubbed the ‘committee to save the world’. All three men were believers in a conventional notion of macroeconomics. The article quoted Summers, sitting characteristically in an international airport ‘recovering from a hectic trip to Moscow’, as declaring: ‘We start with the idea that you can't repeal the laws of economics. Even if they are inconvenient.’

Summers, as part of this trio,

is invariably called the Kissinger of economics: a total pragmatist whose ambition sometimes grates but whose intellect never fails to dazzle. What holds them together is a passion for thinking and an inextinguishable curiosity about a new economic order that is unfolding before them like an Alice in Wonderland world. The sheer fascination of inventing a 21st century financial system motivates them more than the usual Washington drugs of power and money. In the past six years the three men have merged into a kind of brotherhood, with an easy rapport. 34

The Time article captured the spirit of a world, based on American-led multilateralism, that was picked apart after the Asia crisis. After the 2008–9 global financial crisis, the questioning only intensified. The core of the critique was that economists had been captured by particular (Wall Street) interests. Joseph Stiglitz, a major critic of the US government and the IMF during the Asia crisis, claimed that Summers was possibly corrupt: ‘He has been seen to be, and probably is, captured.’ 35 That accusation prompted a quick denial, articulated very forcefully in particular by the economist Kenneth Rogoff, and a defence of economists (such as Summers or IMF Deputy Managing Director Stanley Fischer) as acting on the basis of sound analysis, not ideology. 36 But the debate put the worm in the policy economists' apple: was analysis objective, or might it be distorted, perhaps even unconsciously, by interests? If that was the case, was not multilateralism inherently flawed, and nothing more than a cover for American interests? Thus the longer-term response in many east Asian countries, and most importantly in China, was that national action in the form of insurance, building up currency reserves, was needed as a protection against the imperialism of multilateralism. The long-term aftermath was increasingly assertive nationalism.

The London summit of the G20, held in April 2009, was a dramatic and decisive turning-point in the world's response to the global financial crisis that had been triggered by the collapse of Lehman Brothers the previous September. Again, it appeared at the outset as if committees or international discussions could save the world. There was a determination to learn the ‘right lessons’ from the Great Depression, and in particular the failure of multilateralism at the 1933 World Economic Conference in London.

Initially, relations between the major participants were acutely strained. Some years later, it emerged that the UK's security service had engaged in electronic surveillance of some of the conference participants. The tensions lay in one dimension between the United States and the United Kingdom on one side, and the major continental European countries, France and Germany, on the other. The Anglo-American view—which was also expressed very clearly by the IMF—was the old Keynesian answer: that a large fiscal stimulus was required. In contrast, the continental Europeans argued that their fiscal systems provided a large battery of ‘automatic stabilizers’, that extra discretionary effort would be misplaced, and that some countries might be unwise to undertake large spending programmes as their room for budgetary manoeuvre (‘fiscal space’) was limited.

A second dimension of friction lay in tensions between France and Germany on the one hand, where debates in the aftermath of the crisis had concentrated on tax justice and where, in response, the governments had demanded an energetic and coordinated response to tax evasion, and some other countries, notably China, which felt that the focus on tax transparency was an attempt to stifle the development of their own financial systems. The small tax havens, of course, were not represented in the G20, which by definition was a grouping of 19 large countries and the EU. The small open economies that had been the major winners from globalization in the previous decade—Chile, Ireland, the Netherlands or New Zealand) were not there. The G20 was a meeting of vulnerable and divided large economies.

Given the contention underlying the event, it was surprising that the meeting was so conspicuously successful: it counts as one of the high-water points of international economic cooperation, alongside the Bretton Woods Conference, in stark contrast with the failure during the Great Depression of the 1933 World Economic Conference. Dan Drezner makes the thesis that ‘the system worked’ the centre of his argument. 37

The summit communiqué self-consciously adopted the language of Bretton Woods, reiterating ‘the belief that prosperity is indivisible; that growth, to be sustained, has to be shared’. 38 British Prime Minister Gordon Brown saw it as creating a ‘new world order’. As he put it: ‘This is the day the world came together to fight recession not with words but with a plan for economic recovery and reform.’ 39

US President Barack Obama acknowledged at the press conference that the United States was no longer the sole or dominant great power:

You know, there's been a lot of comparison here about Bretton Woods, the last time you saw the entire international architecture being remade. Well, if it's just [Franklin] Roosevelt and [Winston] Churchill sitting in a room with a brandy, you know, that's an easier negotiation. But that's not the world we live in. And it shouldn't be the world that we live in. 40

At the press conference, Obama added: ‘I would like to think that with my election, we're starting to see some restoration of America's standing in the world. I think we did OK.’ 41 The reference to Bretton Woods is telling: the 1944 conference had been an Anglo-American moment, and there were elements of the 2009 meeting that recreated the old dynamic. It was after all very much a British event, which Gordon Brown saw in missionary terms as rescuing the world. At the pre-conference dinner, when France's President Nicolas Sarkozy said that this was a crisis where ‘none of us have a plan’, President Obama immediately leapt in with the putdown: ‘Gordon has a plan.’ 42

The official response went through two phases: first came Keynesian ‘big bazooka’ rescues, followed by a reckoning with the fiscal and also the political cost. In the immediate aftermath of the sudden shock of 2008, shoring up the financial sector—rescuing banks—was the obvious focus of attention. The US Treasury and the Federal Reserve planned measures to buy up problematic assets, so that the market would be given a floor. But the valuation was a very complex and time-consuming exercise, and so the United States turned to a simpler but apparently effective method that had been pioneered in the UK: recapitalizing banks using government money, so that they would be in a position to carry eventual losses. This was intended to prop up confidence. It was like treating a heart attack: the heart (financial services) needed to be massaged to restore circulation.

The same exercise was repeated in many rich countries. At the time, it was impossible to tell what the long-term fiscal implications would be: it was conceivable, after all, that the values of banks' assets would recover, and that the government would in the end turn a profit on the deal. That happened in the United States, and also in Switzerland. 43 The immediate financial rescue, however, looked like a public relations disaster for governments. The banks had largely caused the crisis through perverse incentives through which they (and their employees) took profits—but now it was proposed that the losses should be socialized. The question was: should the banks not be punished, rather than rewarded?

Supporting consumers through fiscal measures was a crucial additional step in healing, and also a political necessity, in which policy-makers drew on the lessons of the Great Depression. In the initial phases of the 2008–9 crisis, the reaction to the demand shortfall was a traditional Keynesian stimulus. Former US Secretary of the Treasury Larry Summers, who became an adviser to Barack Obama, called for a fiscal stimulus on 19 December 2007, saying it should aim to be ‘timely, targeted, and temporary’. 44 On 18 January 2008, the incumbent treasury secretary Hank Paulson announced a stimulus package. After the collapse of Lehman Brothers, as the crisis intensified, details of a $787 billion stimulus were quickly finalized, and on 17 February 2009 ‘the most sweeping economic package in US history’ was launched. 45 Obama signed the legislation in Denver's museum of nature and science, intending to highlight how much of the spending was directed towards green jobs. 46

In retrospect, the package was criticized by Democrats as inadequate and too small: Vice-President Joe Biden later noted: ‘And we paid a price for it, ironically, for that humility.’ Democratic Senator Chuck Schumer concluded: ‘We cut back on the stimulus dramatically and we stayed in recession for five years.’ Another influential Democrat, Jim Clyburn, believed that ‘One of the—if not the biggest—mistakes that Obama made, in my opinion, was getting the Recovery Act done and not explaining to people what he had done.’ 47

The proposition that fiscal stimulus was needed was also made at an international level. In April 2009, the IMF argued that fiscal stimulus must be

at least sustained, if not increased, in 2010, and countries with fiscal room should stand ready to introduce new stimulus measures as needed to support the recovery. As far as possible, this should be a joint effort, since part of the impact of an individual country's measures will leak across borders, but brings benefits to the global economy. 48

In other words, demand needed to be internationalized in order to ensure continuing prosperity.

With stunning speed, however, the world moved from an international consensus that Keynesian fiscal stimulus was needed to deal with the threat of a new Great Depression to a concern about the long-term implications of the rise of debt and the threat of fiscal unsustainability. The causes of that reversal can be located in the psychology of financial markets, in the work of policy academics, in political manoeuvres, in simple fatigue with both the crisis itself and anti-crisis measures, and finally in widespread frustration at the use of money in bank bailouts.

The first explanation focuses on financial markets, with the major villain being played by ‘bond vigilantes’ (i.e. deficit hawks who sold off government bonds in high-debt countries, sending up interest rates). In mid-2009, the bond market started to terrify. The yield on ten-year US Treasury bonds had fallen from December 2008 (closing at 2.77 on 18 December) to April, but from late April it started to rise, closing at 3.98 on 10 June. On 21 May, Moody's Investors Service announced that it was ‘comfortable’ with an AAA debt rating, which would not be ‘guaranteed forever’ against the backdrop of the deteriorating US fiscal position, as a result of the need to borrow $2 trillion, or 14 per cent of GDP. 49 In Rio Rancho, New Mexico, Barack Obama said: ‘We can't keep on just borrowing from China. We have to pay interest on that debt and that means we are mortgaging our children's future with more and more debt.’ The foreign holders of US debt would eventually ‘get tired’. 50

A second interpretation holds that it was the academic framing of the policy debate that changed perception to a focus on the dangers of government overspending—with a focus on one particular influential book that may have played a key role. In September 2009, Carmen Reinhart and Kenneth Rogoff published their ironically titled study of the centuries-long history of financial and debt crises, This time is different . 51 On one level, the book was a stark warning about the extent of the damage done by complex financial crises, and consequently of the long time (seven years on the historical average) that recovery would take. It was inevitable that readers would ask whether there were short cuts that might yield a quicker recovery. The book framed the post-financial crisis debate by casting contemporary issues in terms of centuries of banking and especially sovereign debt crises. Each collapse was preceded by waves of euphoria in which bond salesmen told their customers ‘this time is different’, and that governments would keep their promises. But of course they did not, and quite regular collapses and defaults occurred, over the course of centuries. The message was that too much government debt could be dangerous. That view was supported by analysis which tried to establish on the basis of some well-known cases that a fiscal contraction could be expansionary, because of its confidence-creating effects. 52

Third, in the political arena the message of austerity was repackaged and reformulated as a political battle cry. In this version, austerity could be used to fight a regressive class war, using budgetary constraints as a way of punishing poorer and marginalized citizens, often from ethnic minorities, who could be lambasted as ‘welfare queens’. Some politicians pointed to bond markets to rationalize their case. Others cited academic literature, including Reinhart and Rogoff. George Osborne, the Conservative politician who became Chancellor of the Exchequer after the UK general election in May 2010, liked to quote Rogoff. He explained to a City of London audience in the 2010 Mais Lecture that Rogoff had, in warning about the consequences of excessive debt, provided ‘the most significant contribution to our understanding of the origins of the crisis’. 53 In the United States, the radical Republican grouping known as the Tea Party—taking its label from fiscal hawkishness during the American Revolution—scored major successes on a campaign for fiscal retrenchment. Judson Phillips, a Tennessee attorney and leader of the Tea Party Nation, explained: ‘That's what got this whole thing started way back in early 2009, when the stimulus bill came out. People just realized that we can't afford this, and we can't spend our way into prosperity.’ 54

Fourth, the massive amount of government spending did not seem to have achieved very much: it was certainly not transformative. An interesting suggestion by Jason Furman, Obama's chair of the Council of Economic Advisers, argued that fatigue had set in:

[P]aradoxically, the worse-than-expected macroeconomic outcomes reduced the desire to take more macroeconomic measures. Even though the bulk of the unexpected deterioration of the economy happened by early-to-mid 2009, before the bulk of the Recovery Act went into effect, this was viewed by some as evidence that the law had not worked, making future stimulus counterproductive. 55

As doubts about the effectiveness of fiscal action set in, worries about the deficit increased.

Fifth, money spent bailing out banks looked like a gift from the taxpayer to those responsible for setting off the financial crisis in the first place. If budget deficits were mostly the consequence of financial sector rescue packages, they were a difficult sell to a broad audience. As Obama's chief of staff Rahm Emanuel later put it, ‘bank bailout was kryptonite’, and the nation was ‘hungry for retribution’. 56 Some commentators also attributed the rise of the Tea Party to the idea that the government was helping mortgage-holders, especially from vulnerable minorities, who did not really deserve a mortgage and home ownership. 57 Spending government money soon began to look generally toxic. Government spending thus generated not a tide of gratitude but an upswell of discontent.

All the elements of the US discussion appeared in differing combinations across the world. The Tea Party was home-grown American. Events in Greece completely turned the debate round in other countries too, most dramatically in Europe—away from the stimulus consensus and towards austerity. Greece was—quite wrongly—interpreted as a trial balloon, or a vision of the fiscal future of the world. On 4 October 2009, George Papandreou led PASOK, the socialist party, to a landslide victory in parliamentary elections that had been called prematurely by the centre-right New Democracy government of Kostas Karamanlis. Karamanlis had made an argument for some fiscal retrenchment, but PASOK put the case differently. Conceding that there was a need to combat patronage and cut down on abuse, PASOK promised that its new government would increase salaries and pensions faster than the rate of inflation rose, and would hire ‘international personalities’ to advise on creative budgetary expansionism. A prominent campaign slogan was: ‘We have money.’ 58 That, after all, was the flavour of the time.

Then a dramatic reversal occurred. Some European finance ministers later complained that IMF advice to raise government spending and increase debt as a countercyclical instrument (‘use fiscal space’) in the face of the economic crisis—directed at Cyprus, Slovenia and Spain—had been ‘contagious’ for other countries, including Greece, where more caution should have been exercised. The IMF advice of 2008–9, recommending a 2 per cent fiscal stimulus, had, after all, been directed at all countries. 59 Immediately after the 2009 election, however, on 6 October, the Bank of Greece presented a report revealing ‘an unprecedented fiscal derailment, which could only be explained to a very small degree by a slump in economic activity’. 60 The fiscal deficit for the first nine months of the year was calculated at 9.7 per cent of GDP. It was ‘absolutely certain’ that the country's fiscal position was unsustainable. 61 Greece then appeared as a harbinger of similar events in other countries, with Portugal, Ireland, Greece and Spain being lumped together by some commentators under the defamatory acronym PIGS. The historian Niall Ferguson went on to explain that the contagion would be general: ‘For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate.’ 62

The lesson was taken particularly seriously in the UK, which became another influential case of a turn away from fiscal expansion. In 2009, the Labour government started to sound increasingly cautious. In particular, Chancellor of the Exchequer Alastair Darling made the point ‘on numerous occasions … [that] getting spending down, halving our borrowing in the four-year period, was non-negotiable: it was absolutely essential’. 63 The opposition Conservatives promised even more cuts, went on to win the 2010 election without gaining an overall parliamentary majority, and then formed a coalition government with the Liberal Democrats. The government embarked on a changed tack—generally known as ‘austerity’ by its critics—that seemed explicitly to follow the advice of Kenneth Rogoff and others who had warned about the destabilizing effects of large government debt. British policy-makers at this point warned, alarmingly, about the possibility of the UK turning into another Greece. 64

A key part of the bad dynamic in Greece—but also elsewhere in the eurozone, and in the UK—was the ‘doom loop’ which linked banks and governments in multiple ways. The simplest linkage was through the cost of bailouts of bad banks: that involved a fiscal expense, so the creditworthiness of the government sank and the yields on bonds rose, with the result that their prices fell. But the government debt appeared as an asset on the balance sheets of banks, whose capital was thus further eroded. And there were other links: higher government debt meant higher taxes in the future, increased costs for businesses (including banks) and thus reduced profits, so the value of other assets in bank balance sheets eroded.

The legacy of the financial crisis also included the shift to a new, confrontational vision of geopolitics. After 2012, Chinese President Xi Jinping turned away from the ‘Bide Your Time’ approach of his predecessors. And whereas Vladimir Putin had been a cooperative if not enthusiastic member of the G8, the 2008–9 financial crisis marked a period when he shifted Russia to a much more confrontational stance. When it appeared that a consequence of the financial crisis was regime instability, and when autocracies in the Middle East were violently overthrown in the Arab Spring uprisings of the early 2010s, Putin saw not only an opportunity but a strategic necessity to confront the formerly dominant West.

Coordinated fiscal expansion had failed; multilateralism had run into the sands; all that was left was monetary action. In a turn of phrase that became famous, Federal Reserve Governor Jeremy Stein explained that money got into ‘all of the cracks’. 65 It did not look as precisely targeted as fiscal action, where the identification of beneficiaries prompted a pushback. However, exactly that feature proved to be the long-term problem: filling the cracks meant pushing up asset prices, and that of course also had redistributional consequences, both domestically and internationally. Indeed, the centrality of monetary policy—including the use of money as a way of implementing sanctions—persuaded China and Russia that it was vital not to leave the monetary system to the United States and its allies, and that new institutions and instruments were required in consequence.

The central banks of what was sometimes called the G4—the United States, the euro area, Japan and the United Kingdom—started to act in very similar ways, without explicit coordination. Instead, the Federal Reserve set a particular model, derived from reflection on failed Japanese responses to that country's malaise of the early 2000s, that could in turn be imitated in other parts of the world, including Japan. One striking feature of these new monetary regimes was that they had some protectionist edge, in that they were expected to produce currency depreciation and hence gains for exporters and for manufacturing employment. They thus produced something of a zero-sum mentality, and resembled a return to some of the worst and most corrosive elements of 1930s international relations.

These mentalities, derived from the experience of the 2008–9 financial crisis, shaped the response to the COVID–19 pandemic after 2020. There was a zero-sum mentality with regard to access to vaccines—an area which should have been regarded as a public good. There was a wholly appropriate initial fiscal and monetary stimulus at the outset, but insufficient recognition that such macroeconomic stimulus on its own would not lead to the production of more vaccines, glass vials or computer chips: in short, of the physical and technical infrastructure needed for a fundamentally different world.

In each episode, the short-term response should be distinguished from a more medium-term reorientation of policy that represented a backlash against initial misassessments and inadequately sized rescues—in short, failure. In the Great Depression, there was initially a failure of leadership; then each country thought it needed to go it alone. In the Asia crisis of 1997, there was multilateral action, which was painful; in the medium term, countries took steps to ensure that they would not have to endure a repeat, and that monetary self-insurance meant increased distrust of multilateralism. In the global financial crisis of 2008–9, there was a coordinated fiscal response—and then a blowback, in which monetary action became the only game in town, accompanied by more distance from the international system. The aftermath of the financial crisis generated a zero-sum view of the world that in particular transformed the visions of Xi Jinping and Vladimir Putin, but then spilled over more broadly into a new geopolitical discourse.

The Great Depression was a lasting example—a negative model—of how not to do it. The immediate response, a sense of helplessness and the failure of any rescue mechanism, conjured up the idea that a second-best option, national orientation, might work as a way of saving capitalism and democracy. Even though multilateral solutions might have been the best answer, the concrete dynamics of responding to crises politically produce national solutions, which may in turn drive a nationalization of politics. In the interwar period, this logic intensified the nationalist and conflictual escalation that led to Asian and European war by the end of the 1930s and world war after 1941. Subsequently there was a sustained attempt to foster multilateralism: the locution ‘Bretton Woods’ is eternally associated with this ideal, and international problems generally generate a call for a ‘new Bretton Woods’. Initially, that course looked highly successful in containing crises in 1997–8 and in 2008–2009, and in both those cases the result was widely celebrated at the outset. But in each case the medicine against crisis produced new problems, specifically a buildup of international imbalances, and—in both the 2000s and the 2010s—a surge of asset prices that both undermined financial stability and generated increasing political tensions around the resultant wealth inequality.

The conventional solutions are always inadequate, and cannot deal with the social and political fallout from increasing disillusion with the way in which the solutions are applied, and with the (in part) unintended consequences they produce. The side-effects of anti-crisis medicine are unpleasant. There is, then, perhaps a more general lesson from the Great Depression: that a fundamental disorder can only be dealt with through fundamental reordering; but such a geopolitical upheaval as occurred in 1945 is also full of risks and dangers, and it is to say the least unclear that a Xi–Putin axis would be the most effective pillar of a better and more stable world to replace the Anglo-American vision of Bretton Woods and 1945. Historians in retrospect will inevitably complain about the solutions adopted at the time, as they now do with respect to the Great Depression, the Asia crisis and the global financial crisis. But they find it difficult to draw any universal or generally applicable lessons.

Crises: there are no obvious answers. Crises: they break out when it is too late to fix the problem. But what politician or what international institution would have the nerve to stand there and just reiterate Hamlet's fatalistic observation? The fact is that we systematically fail on the ‘readiness’; and that is why crisis policies always, inevitably, sadly, frustratingly, become an exercise in how not to do it.

See Michael D. Bordo and Harold James, ‘The Great Depression analogy’, Financial History Review 17: 2, 2010, pp. 127–40.

Youssef Cassis and Catherine Schenk, eds, Remembering and learning from financial crisis (Oxford: Oxford University Press, 2021).

Barry Eichengreen, Hall of mirrors: the Great Depression, the Great Recession, and the uses—and misuses—of history (New York: Oxford University Press, 2015), p. 377; Barry Eichengreen, ‘Versailles: the economic legacy’, International Affairs 95: 1, 2019, pp. 7–24.

Eichengreen, Hall of mirrors, p. 378.

See e.g. Mancur Olson, The rise and decline of nations: economic growth, stagflation, and social rigidities (New Haven, CT: Yale University Press, 1982); George Gilder, Knowledge and power: the information theory of capitalism and how it is revolutionizing our world (Washington DC: Regnery, 2013).

Knut Borchardt, Wachstum, Krisen, Handlungsspielräume der Wirtschaftspolitik: Studien zur Wirtschaftsgeschichte des 19. und 20. Jahrhunderts, Kritische Studien zur Geschichtswissenschaft no. 50 (Göttingen: Vandenhoeck & Ruprecht, 1982).

W. Arthur Lewis, Economic survey 1919–1939 (London: Allen & Unwin, 1949).

Richard E. Edmondson, ‘Abreast of the market’, Wall Street Journal, 22 June 1931.

See Joshua Cooper Ramo, ‘The three marketeers’, Time, 15 Feb. 1999 (and cover of magazine), http://content.time.com/time/world/article/0,8599,2054093,00.html . (Unless otherwise noted at point of citation, all URLs cited in this article were accessible on 20 Feb. 2022.)

Quoted in Ross Hawkins, ‘G20 leaders seal $1tn global deal’, Analysis, BBC News, 2 April 2009, http://news.bbc.co.uk/2/hi/uk_news/politics/7979539.stm .

Michael D. Shear and David E. Sanger, ‘“I stand squarely behind my decision”: Biden defends withdrawal amid deadly chaos in Afghanistan’, New York Times, 16 Aug. 2021, https://www.bostonglobe.com/2021/08/16/nation/biden-address-nation-deadly-chaos-afghanistan/ .

Ben S. Bernanke, Essays on the Great Depression (Princeton: Princeton University Press, 2004), p. 5.

Ben S. Bernanke, The courage to act: a memoir of the crisis and its aftermath (New York: Norton, 2015), p. 264.

On debt and economic constraints, see Michael D. Bordo and Christopher M. Meissner, Original sin and the Great Depression, working paper no. 27067 (Cambridge, MA: National Bureau of Economic Research, April 2020).

Phyllis Deane and Brian Mitchell, Abstract of British historical statistics (Cambridge: Cambridge University Press, 1971), pp. 62–6.

Quoted in A. J. P. Taylor, English history 1914–1945, Oxford History of England, vol. 15 (New York: Oxford University Press, 1965), p. 239.

Robert A. Brady, The rationalization movement in German industry: a study in the evolution of economic planning (Berkeley: University of California Press, 1933).

Stephen A. Schuker, American ‘reparations’ to Germany, 1919–33: implications for the third-world debt crisis (Princeton: Princeton University Press, 1988).

Quoted in Roy F. Harrod, The life of John Maynard Keynes (Harmondsworth: Penguin, 1972; first publ. 1951), p. 545.

Milton Friedman and Anna Jacobson Schwartz, The Great Contraction, 1929–1933 (Princeton: Princeton University Press, 1965).

The question of whether French support might have helped Germany to avoid the harsh deflation which ensued was the subject of a recent controversy: the debate ended with a rejection of the ‘invented’ hypothesis of the offer of French credits as an alternative to Heinrich Brüning's deflation policy in 1931. The notion was proposed in Paul Köppen, ‘“Aus der Krankheit konnten wir unsere Waffe machen”: Heinrich Brünings Spardiktat und die Ablehnung der französischen Kreditangebote 1930/31’, Vierteljahrshefte für Zeitgeschichte 62: 3, 2014, pp. 349–75; Tim B. Müller, ‘“Demokratie und Wirtschaftspolitik in der Weimarer Republik’, Vierteljahrshefte für Zeitgeschichte 62: 4, 2014, pp. 569–601. It is compellingly refuted in Knut Borchardt, ‘Eine Alternative zu Brünings Sparkurs? Zu Paul Köppens Erfindung französischer Kreditangebote’, Vierteljahrshefte für Zeitgeschichte 63: 2, 2015 pp. 229–39; Roman Köster, ‘Keine Zwangslagen? Anmerkungen zu einer neuen Debatte über die deutsche Wirtschaftspolitik in der Großen Depression’, Vierteljahrshefte für Zeitgeschichte 63: 2, 2015, pp. 241–58; Sylvain Schirmann, ‘Zur Frage französischer Kredite für Deutschland 1930/31: Frankreichs politischer Ansatz’, Vierteljahrshefte für Zeitgeschichte 65: 4, 2017, pp. 581–97.

The reason why there was contagion from Austria to Germany, even though there was very limited German financial involvement in Austria, has been a topic of longstanding discussion. See Charles P. Kindleberger, The world in depression 1929–1939 (Berkeley: University of California Press, 1973); Harold James, The German slump: politics and economics 1924–1936 (Oxford: Oxford University Press, 1986); and, recently, Nathan Marcus, Austrian reconstruction and the collapse of global finance, 1921–1931 (Cambridge, MA: Harvard University Press, 2018).

Edward W. Bennett, Germany and the diplomacy of the financial crisis (Cambridge, MA: Harvard University Press, 1962).

See Gianni Toniolo with Piet Clement, Central bank cooperation at the Bank for International Settlements, 1930–1973 (New York: Cambridge University Press, 2005).

Barry Eichengreen and Douglas A. Irwin, ‘The slide to protectionism in the Great Depression: who succumbed and why?’, Journal of Economic History 70: 4, 2010, pp. 871–97.

See Harold James, The end of globalization: lessons from the Great Depression (Cambridge, MA: Harvard University Press, 2001).

Patricia Clavin, The failure of economic diplomacy: Britain, Germany, France and the United States, 1931–36 (New York: St Martin's, 1996); from the time see also Herbert Samuel, ‘The World Economic Conference’, International Affairs 12: 4, 1933, pp. 439–59.

Franklin Roosevelt, ‘Wireless to the London Conference’, 3 July 1933, https://www.presidency.ucsb.edu/documents/wireless-the-london-conference .

John Maynard Keynes, ed. Donald Moggridge, Collected writings, vol. 21, Activities 1931–1939: world crises and policies in Britain and America (Cambridge: Cambridge University Press, 1981), p. 273.

Panicos O. Demetriades and Bassam A. Fattouh, ‘The South Korean financial crisis: competing explanations and policy lessons for financial liberalization’, International Affairs 75: 4, 1999, pp. 779–92; Brigitte Granville, ‘Bingo or fiasco? The global financial situation is not guaranteed’, International Affairs 75: 4, 1999, pp. 713–28; Victor Bulmer-Thomas, ‘The Brazilian devaluation: national responses and international consequences’, International Affairs 75: 4, 1999, pp. 729–41.

James M. Boughton, Tearing down walls: the International Monetary Fund, 1990–1999 (Washington DC: International Monetary Fund [IMF], 2012), p. 535.

Boughton, Tearing down walls, p. 328.

See e.g. the lacerating indictment by Janine Wedel, Unaccountable: how elite power brokers corrupt our finances, freedom, and security (New York: Pegasus, 2014).

Ramo, ‘The three marketeers’.

Quoted in Michael Hirsh, ‘The comprehensive case against Larry Summers’, The Atlantic, 13 Sept. 2013, https://www.theatlantic.com/business/archive/2013/09/the-comprehensive-case-against-larry-summers/279651/ .

Kenneth Rogoff, ‘An open letter to Joseph Stiglitz’, IMF Views and Commentaries, 2 July 2002, https://www.imf.org/en/News/Articles/2015/09/28/04/54/vc070202 .

Daniel W. Drezner, The system worked: how the world stopped another Great Depression (New York: Oxford University Press, 2014).

See Henry Morgenthau's closing address at the conference, https://www.cvce.eu/content/publication/2003/12/12/b88b1fe7-8fec-4da6-ae22-fa33edd08ab6/publishable_en.pdf .

Quoted in George Parker, Chris Giles, Edward Luce and David Oakley, ‘G20 leaders claim summit success’, Financial Times, 2 April 2009.

Barack Obama, G20 Press Conference, London, April 2, 2009, https://www.cbsnews.com/news/transcript-obamas-g20-press-conference/ .

Quoted in Jonathan Weisman and Alistair MacDonald, ‘G-20 in London: Brown and Obama claim summit victories’, Wall Street Journal Europe, 3 April 2009.

Gordon Brown, My life, our times (London: Bodley Head, 2017), p. 312.

Luc Laeven and Fabian Valencia, Resolution of banking crises: the good, the bad, and the ugly, IMF working paper no. 10.146 (Washington DC, 2010); Timotej Homar and Sweder J. G. van Wijnbergen, ‘Bank recapitalization and economic recovery after financial crises’, Journal of Financial Intermediation 32: C, 2017, pp. 16–28.

Lawrence Summers, ‘Risks of recession, prospects for policy’, remarks at the Brookings Institution on ‘State of the US economy’, Washington DC, 19 Dec. 2007.

Ewen MacAskill, ‘Obama signs $787bn bill, and it may not be last’, Guardian, 17 Feb. 2009.

MacAskill, ‘Obama signs $787bn bill’.

All three statements quoted in Alex Thompson and Theodoric Meyer, ‘Democrats trash Obama's stimulus to sell Biden's’, Politico, 11 March 2021.

IMF, World Economic Outlook, April 2009: crisis and recovery, April 2009, p. xix.

Jennifer Ablan, ‘Analysis: US Treasury bloodbath soaks top fund managers’, Reuters News, 5 June 2009.

‘Obama says US can't keep borrowing from China’, Reuters, 14 May 2009.

Carmen M. Reinhart and Kenneth Rogoff, This time is different: eight centuries of financial folly (Princeton: Princeton University Press, 2009).

Alberto Alesina and Silvia Ardagna, ‘Tales of fiscal adjustment’, Economic Policy 13: 27, October 1988, pp. 498–545.

George Osborne, ‘The Mais Lecture: a new economic model’, 24 Feb. 2010, https://conservative-speeches.sayit.mysociety.org/speech/601526 .

Gerald F. Seib, ‘Tea-Party call to cut spending gains traction’, Wall Street Journal, 2 July 2010.

Jason Furman, ‘The fiscal response to the Great Recession: steps taken, paths rejected, and lessons for next time’, Brookings preliminary discussion, draft Sept. 2018, p. 20, https://www.brookings.edu/wp-content/uploads/2018/08/12-Fiscal-Policy-Prelim-Disc-Draft-2018.09.11.pdf .

Rahm Emanuel, ‘Not every “serious crisis” is alike’, Wall Street Journal, 18 April 2021.

Ben McGrath, ‘The movement: the rise of Tea Party activism’, New Yorker, 1 Feb. 2010, https://www.newyorker.com/magazine/2010/02/01/the-movement ; also Neil Fligstein, The banks did it: an anatomy of the financial crisis (Cambridge, MA: Harvard University Press, 2021).

Helena Smith, ‘Left's dynasty to rule in Greece again’, Observer, 4 Oct. 2009.

Simeon Djankov, Inside the euro crisis: an eyewitness account (Washington DC: Peterson Institute for International Economics, 2014), p. 65.

Yannis Palaiologos, ‘The story behind Greece's “unprecedented fiscal derailment” in 2009’, Ekathimerini, 12 Jan. 2018.

Palaiologos, ‘The story behind Greece's “unprecedented fiscal derailment”.

Niall Ferguson, ‘A Greek crisis is coming to America’, Financial Times, 10 Feb. 2010.

Quoted in Chris Giles and George Parker, ‘Devil in the detail as era of austerity begins’, Financial Times, 18 Jan. 2010.

David Ramsden, ‘The government's strategy for sustainable growth’, in Gabriele Giudice, Robert Kuenzel and Tom Springbett, eds, The UK economy: the crisis in perspective (Abingdon: Routledge, 2011), pp. 203, 206.

Jeremy Stein, ‘Overheating in credit markets: origins, measurement, and policy responses’, speech to Federal Reserve, Washington DC, 7 Feb. 2013, https://www.federalreserve.gov/newsevents/speech/stein20130207a.htm .

Author notes

Email alerts, citing articles via.

  • Recommend to Your Librarian
  • Advertising and Corporate Services

Affiliations

  • Online ISSN 1468-2346
  • Print ISSN 0020-5850
  • Copyright © 2024 The Royal Institute of International Affairs
  • About Oxford Academic
  • Publish journals with us
  • University press partners
  • What we publish
  • New features  
  • Open access
  • Institutional account management
  • Rights and permissions
  • Get help with access
  • Accessibility
  • Advertising
  • Media enquiries
  • Oxford University Press
  • Oxford Languages
  • University of Oxford

Oxford University Press is a department of the University of Oxford. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide

  • Copyright © 2024 Oxford University Press
  • Cookie settings
  • Cookie policy
  • Privacy policy
  • Legal notice

Winter 2024 Economic Forecast: A delayed rebound in growth amid faster easing of inflation

Key figures.

EU: 2023: 0.5% 2024: 0.9% 2025: 1.7%

Euro area: 2023: 0.5% 2024: 0.8% 2025: 1.5%

EU: 2023: 6.3% 2024: 3.0% 2025: 2.5%

Euro area: 2023: 5.4% 2024: 2.7% 2025: 2.2%

Executive summary

This Winter interim Forecast lowers the growth outlook for this year and sets inflation on a lower downward path than projected last autumn. Economic activity in 2023 is now estimated to have expanded by only 0.5% in both the EU and the euro area. The growth outlook for 2024 is revised down to 0.9% in the EU and 0.8% in the euro area. In 2025, economic activity is still expected to expand by 1.7% in the EU and 1.5% in the euro area. EU HICP inflation is forecast to fall from 6.3% in 2023 to 3.0% in 2024 and 2.5% in 2025. In the euro area, it is projected to decelerate from 5.4% in 2023 to 2.7% in 2024 and to 2.2% in 2025.

Last year’s modest growth largely owes itself to the momentum of the post-pandemic economic rebound in the previous two years. Already towards the end of 2022, the economic expansion came to an abrupt end and activity has since been broadly stagnating, against the background of falling household purchasing power, collapsing external demand, forceful monetary tightening and the partial withdrawal of fiscal support in 2023. The EU economy thus entered 2024 on a weaker footing than previously expected. After narrowly avoiding a technical recession in the second half of last year, prospects for the first quarter of 2024 remain subdued.

Still, there have been positive developments since the 2023 Autumn Forecast, particularly when it comes to inflation. The sharp fall in energy prices was followed by a broad-based and faster-than-expected moderation of price pressures. As energy supply keeps outstripping demand, spot and future prices for oil and especially gas are now significantly lower than assumed in the Autumn Forecast. Retail energy prices are therefore set to fall further, helping EU recover some of the competitiveness lost during the energy crisis. Despite mild upward pressure from higher shipping costs in the wake of Red Sea trade disruptions, underlying inflation continues on a steady downward path. Credit conditions are still tight, but markets now expect the loosening cycle to start earlier. Remarkably, the EU labour market continues to perform strongly.

All in all, the conditions for a gradual acceleration of economic activity this year appear to be still in place. As inflation decelerates, real wage growth and resilient employment should support a rebound in consumption. Despite falling profit margins, investment is set to benefit from a gradual easing of credit conditions and further deployment of the Recovery and Resilience Facility (RRF). The pace of growth is set to stabilise broadly in line with potential, as of the second half of this year.

Protracted geopolitical tensions and the broadening of the Middle East conflict to the Red Sea tilt the balance of risks towards more adverse outcomes. Additional trade disruptions could bring renewed stress to supply chains, hampering production and adding price pressures. Domestically, a faster recovery of consumption, higher-than-expected wage growth and a lower-than-anticipated fall in profit margins could hold back the disinflation process. On the downside, a more persistent transmission of the still tight monetary conditions could further delay the rebound in economic activity, pushing inflation lower. Climate risks and the increasing frequency of extreme weather events continue to pose threats.

Forecast for countries

Economic forecast for Austria

Economic forecast for Belgium

Economic forecast for Bulgaria

Economic forecast for Croatia

Economic forecast for Cyprus

Economic forecast for Czechia

Economic forecast for Denmark

Economic forecast for Estonia

Economic forecast for Finland

Economic forecast for France

Economic forecast for Germany

Economic forecast for Greece

Economic forecast for Hungary

Economic forecast for Italy

Economic forecast for Ireland

Economic forecast for Latvia

Economic forecast for Lithuania

Economic forecast for Luxembourg

Economic forecast for Malta

Economic forecast for Netherlands

Economic forecast for Poland

Economic forecast for Portugal

Economic forecast for Romania

Economic forecast for Slovakia

Economic forecast for Slovenia

Economic forecast for Spain

Economic forecast for Sweden

Economic forecast for EU

Economic forecast for EA

The European economy has left behind it an extremely challenging year, in which a confluence of factors severely tested our resilience. The rebound expected in 2024 is set to be more modest than projected three months ago, but to gradually pick up pace on the back of slower price rises, growing real wages and a remarkably strong labour market. Investment is expected to hold up, buoyed by easing credit conditions and the flow of RRF funding. In 2025, growth is set to firm and inflation to decline to close to the ECB’s 2% target. Geopolitical tensions, an ever more unstable climate and a number of crucial elections around the world this year are all factors increasing the uncertainty around this outlook.

Winter Forecast 2024 - Quote - Gentiloni

Impact of the Red Sea crisis on the EU economic outlook

Winter Forecast 2024 - Box2

EU non-financial corporations in a challenging economic environment

Winter Forecast 2024 - Box3

Household savings and wealth in the euro area

Winter Forecast 2024 - Box4

Food inflation in the euro area

Press release of 15 February 2024

EC press conference by Commissioner Paolo GENTILONI on the 2024 Winter Economic Forecast

Share this page

The cost-of-living crisis is having a global impact. Here’s what countries are doing to help

Close-up on hands holding 100 dollar US bank notes all fanned out. Here are some of the human impacts of the cost of living crisis - and what countries are doing to help.

Here are some of the human impacts of the cost of living crisis - and what countries are doing to help. Image:  Unsplash/Alexander Mils

.chakra .wef-1c7l3mo{-webkit-transition:all 0.15s ease-out;transition:all 0.15s ease-out;cursor:pointer;-webkit-text-decoration:none;text-decoration:none;outline:none;color:inherit;}.chakra .wef-1c7l3mo:hover,.chakra .wef-1c7l3mo[data-hover]{-webkit-text-decoration:underline;text-decoration:underline;}.chakra .wef-1c7l3mo:focus,.chakra .wef-1c7l3mo[data-focus]{box-shadow:0 0 0 3px rgba(168,203,251,0.5);} Kate Whiting

how to solve financial crisis in a country

.chakra .wef-9dduvl{margin-top:16px;margin-bottom:16px;line-height:1.388;font-size:1.25rem;}@media screen and (min-width:56.5rem){.chakra .wef-9dduvl{font-size:1.125rem;}} Explore and monitor how .chakra .wef-15eoq1r{margin-top:16px;margin-bottom:16px;line-height:1.388;font-size:1.25rem;color:#F7DB5E;}@media screen and (min-width:56.5rem){.chakra .wef-15eoq1r{font-size:1.125rem;}} Economic Progress is affecting economies, industries and global issues

A hand holding a looking glass by a lake

.chakra .wef-1nk5u5d{margin-top:16px;margin-bottom:16px;line-height:1.388;color:#2846F8;font-size:1.25rem;}@media screen and (min-width:56.5rem){.chakra .wef-1nk5u5d{font-size:1.125rem;}} Get involved with our crowdsourced digital platform to deliver impact at scale

Stay up to date:, economic progress.

Listen to the article

This article was first published in July 2022 and updated in September 2022.

  • The soaring cost of food and energy is affecting people across the globe.
  • An additional 71 million people could be pushed into poverty, according to the United Nations Development Programme.
  • Reuters has been speaking to people in different countries in its series of Inflation Diaries.
  • Here are some of the human impacts of the cost of living crisis - and what countries are doing to help.

The economic impacts of the Russian invasion of Ukraine are rippling out across the globe in a cost of living crisis that’s pushing millions more people into poverty.

Soaring food and energy prices have resulted in 71 million people in developing countries falling into poverty , according to the UN Development Programme (UNDP).

“Unprecedented price surges mean that for many people across the world, the food that they could afford yesterday is no longer attainable today,” says UNDP Administrator, Achim Steiner.

While supply-chain disruptions from the COVID-19 pandemic had already pushed up prices, inflation is rising due to further disruptions caused by the war in Ukraine.

Most of the 166.8% cost increase in natural gas over the 12 months to May 2022 has been recorded since the war began in February. Russia’s war in Ukraine is also responsible for almost 40% of the annual price increase of wheat and for 60-75% of the annual price increases of corn and sunflower seed oil, according to UNDP.

Graph showing the effect on the poor of the global cost of living crisis.

Worldwide impact of the cost of living crisis

The countries facing the worst effects of the crisis across all poverty lines, according to UNDP, are Armenia and Uzbekistan in Central Asia; Burkina Faso, Ghana, Kenya, Rwanda, and Sudan in sub-Saharan Africa; Haiti in Latin America; and Pakistan and Sri Lanka in South Asia.

But even in the most developed countries, people are going without food. In May, an Ipsos poll for the World Economic Forum found that 1 in 4 people were struggling financially in 11 developed countries . In the UK, as many as 1 in 7 adults now say they can’t afford to eat every day - an increase of 57% since January.

The poorest families are the most affected by price rises because food and energy bills make up a bigger proportion of their monthly outgoings - in some cases, twice as much.

Reuters has been reporting on the impacts of the cost of living crisis in 18 countries around the globe in its three-part 'Inflation Diaries' series. Here are some of the ways inflation is affecting people’s daily lives:

  • In Kenya, inflation is running at a five-year high of nearly 8%. Single mother-of-three Florence Kageha, 44, who sells vegetables, has had to start cooking with firewood or charcoal instead of kerosene. The family are walking everywhere, rather than taking motorcycle taxis, and they eat meat once a month. "The price of vegetables at the wholesale market has doubled, so I have to sell at double the price, but the customers can't afford it and I end up making a loss," she told Reuters .
  • In the UK, where inflation has climbed to its highest rate in 40 years, from 1.6% to 9.1% in 18 months, 62-year-old Lenny Poynton, from south-east London, has been out of work since losing his job in removals in early 2021. He’s living on state welfare of around $300 a month and has been fasting regularly so he has enough money to buy food for his dog. "It's an uphill struggle to make ends meet," he told Reuters .
  • In Bangladesh, graduate Abdus Salam is one of 3.6 million unemployed people who are struggling to find work as inflation hits an eight-year high. He is living on $32 a month, so has swapped his morning breakfast of boiled eggs for chickpeas and a few nuts. He said: "I always think positive. I'm a fighter."
  • In Turkey, annual inflation is at a 24-year high of nearly 80% - but some experts say the true figure is more than double this official statistic. A March survey of residents in Istanbul found almost half could not afford red meat and a third could not buy vegetable oil. Pelin Miskioglu, who serves traditional Turkish breakfast to tourists at her cafe in the riviera town of Kas, said her regulars can no longer afford a beach holiday: "I don't think we will be able to survive this."
  • In Australia, where inflation is at its highest rate in more than 20 years, single parent Genevieve fears she and her son will be homeless after she was evicted from her Melbourne home. The rising cost of food has made preparing special meals for her son, who has multiple allergies, more difficult. She often skips meals to ensure he has enough to eat. "I just go without. I don't have any luxuries, I don't buy new clothes, I don't get my hair cut."
  • Venezuela has left a four-year period of hyperinflation , which is when monthly inflation rises above 50%. In 2018, inflation reached 65,000%, according to the BTI Transformation Index. Many Venezuelans have picked up extra jobs - or left the country in order to work and send money home from abroad. Retired schoolteacher Maria Teresa Clemente, 64, who lives in Caracas, took up side jobs such as sewing and hairdressing to pay her bills. "Most Venezuelans can't afford a funeral to bury a family member. What we do today is ask for donations from our communities to help pay for funerals," she said.

What are countries doing to ease the cost of living?

Governments are bringing in measures designed to ease the impact of inflation, including tax cuts, free train travel, energy subsidies and cash transfers.

However, the UNDP report warns that not all policies will be equally effective and some may disproportionately benefit wealthier people.

Graph showing how policy responses could ease the cost of living.

“While blanket energy subsidies may help in the short term, in the longer term they drive inequality, further exacerbate the climate crisis, and do not soften the immediate blow of the cost of lliving increase as much as targeted cash transfers do,” says report author George Gray Molina, UNDP Head of Strategic Policy Engagement. “They offer some relief as an immediate band-aid, but risk causing worse injury over time.”

Here are a few ways countries are supporting people:

  • In Spain, train travel over distances up to 300km will be free for the three months from September to December, for those buying a multi-trip ticket.
  • In Kenya, President Uhuru Kenyatta, who is stepping down after two terms in August, has increased the monthly minimum wage by 12%. The government is helping farmers pay for fertilizers and is providing fuel subsidies.
  • Germany has taken a similar approach, where the federal government introduced a $9 monthly public transport pass until August.
  • The government in India has restricted wheat and sugar exports and announced tax cuts to fuel and essential goods to help insulate consumers.
  • In Scotland, First Minister Nicola Sturgeon has set out plans to freeze rents to help people cope with the rising costs of energy and food.
  • The UK is giving 8 million low-income households a direct payment of $780 split into two instalments, while every household will get a $480 energy grant.
  • Bangladesh is introducing family ration cards to ensure low-income households have essential goods.

The financial services industry is facing several future risks, including vulnerabilities to cyberattacks due to artificial intelligence and new financial products creating debt.

The World Economic Forum’s Centre for Financial and Monetary Systems works with the public and private sectors to design a more sustainable, resilient, trusted and accessible financial system worldwide.

Learn more about our impact:

  • Net zero future: Our Financing the Transition to a Net Zero Future initiative is accelerating capital mobilization in support of breakthrough decarbonization technologies to help transition the global economy to net zero emissions.
  • Green Building Principles: Our action plan for net zero carbon buildings offers a roadmap to help companies deliver net zero carbon buildings and meet key climate commitments.
  • Financing biodiversity: We are convening leading financial institutions to advance the understanding of risks related to biodiversity loss and the opportunities to adopt mitigation strategies through our Biodiversity Finance initiative.

Want to know more about our centre’s impact or get involved? Contact us .

Have you read?

Cost of living crisis: 1 in 4 people in the developed world are struggling, poll shows, why is inflation so high and will it stay that way an economist explains, the economies that are home to the poorest billions of people need to grow if we want global poverty to decline, don't miss any update on this topic.

Create a free account and access your personalized content collection with our latest publications and analyses.

License and Republishing

World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

Related topics:

The agenda .chakra .wef-n7bacu{margin-top:16px;margin-bottom:16px;line-height:1.388;font-weight:400;} weekly.

A weekly update of the most important issues driving the global agenda

.chakra .wef-1dtnjt5{display:-webkit-box;display:-webkit-flex;display:-ms-flexbox;display:flex;-webkit-align-items:center;-webkit-box-align:center;-ms-flex-align:center;align-items:center;-webkit-flex-wrap:wrap;-ms-flex-wrap:wrap;flex-wrap:wrap;} More on Economic Progress .chakra .wef-nr1rr4{display:-webkit-inline-box;display:-webkit-inline-flex;display:-ms-inline-flexbox;display:inline-flex;white-space:normal;vertical-align:middle;text-transform:uppercase;font-size:0.75rem;border-radius:0.25rem;font-weight:700;-webkit-align-items:center;-webkit-box-align:center;-ms-flex-align:center;align-items:center;line-height:1.2;-webkit-letter-spacing:1.25px;-moz-letter-spacing:1.25px;-ms-letter-spacing:1.25px;letter-spacing:1.25px;background:none;padding:0px;color:#B3B3B3;-webkit-box-decoration-break:clone;box-decoration-break:clone;-webkit-box-decoration-break:clone;}@media screen and (min-width:37.5rem){.chakra .wef-nr1rr4{font-size:0.875rem;}}@media screen and (min-width:56.5rem){.chakra .wef-nr1rr4{font-size:1rem;}} See all

how to solve financial crisis in a country

India's retail prices slow, and other economics stories to read this week

February 16, 2024

how to solve financial crisis in a country

Chinese consumer prices fall and other economics stories to read this week

February 9, 2024

how to solve financial crisis in a country

Expect the unexpected: The IMF’s Kristalina Georgieva on what's ahead for the global economy

Simon Torkington

February 8, 2024

how to solve financial crisis in a country

Lessons from Cambodia: how it is outgrowing its least developed status through openness

Cham Nimul and Ratnakar Adhikari

how to solve financial crisis in a country

These 6 ‘longevity economy’ principles can help an ageing population live well

Victoria Masterson

how to solve financial crisis in a country

Global economy nears soft landing, says IMF

Pierre-Olivier Gourinchas

Feature: The Country With Nothing Left to Lose

Create an FP account to save articles to read later and in the FP mobile app.

ALREADY AN FP SUBSCRIBER? LOGIN

  • World Brief
  • Editors’ Picks
  • Africa Brief
  • China Brief
  • Latin America Brief
  • South Asia Brief
  • Situation Report
  • Flash Points
  • War in Ukraine
  • Israel and Hamas
  • U.S.-China competition
  • Biden's foreign policy
  • Trade and economics
  • Artificial intelligence
  • Asia & the Pacific
  • Middle East & Africa

Anders Fogh Rasmussen on Two Years of Russia’s War in Ukraine

Ones & tooze, foreign policy live.

magazine cover image

Winter 2024 Issue

Print Archive

FP Analytics

  • In-depth Special Reports
  • Issue Briefs
  • Power Maps and Interactive Microsites
  • FP Simulations & PeaceGames
  • Graphics Database

Promise Over Peril: Part Four

The promise and pitfalls of climate policy, defending democracy, promise over peril: part five, her power 2024.

By submitting your email, you agree to the Privacy Policy and Terms of Use and to receive email correspondence from us. You may opt out at any time.

Your guide to the most important world stories of the day

how to solve financial crisis in a country

Essential analysis of the stories shaping geopolitics on the continent

how to solve financial crisis in a country

The latest news, analysis, and data from the country each week

Weekly update on what’s driving U.S. national security policy

Evening roundup with our editors’ favorite stories of the day

how to solve financial crisis in a country

One-stop digest of politics, economics, and culture

how to solve financial crisis in a country

Weekly update on developments in India and its neighbors

A curated selection of our very best long reads

The Country With Nothing Left to Lose

In its quest for cash, the tiny island nation of nauru has tried it all. its latest scheme may be its riskiest bet yet..

  • Foreign & Public Diplomacy
  • Climate Change
  • Environment
  • Christina Lu

If an apocalypse struck Earth, Sam Bankman-Fried—the billionaire tech entrepreneur behind the United States’ most explosive cryptocurrency scandal—wasn’t ready to die.

Like any responsible doomsday prepper, the now-convicted FTX founder hatched a survival plan. According to a memo between his brother and an FTX executive, Bankman-Fried planned to buy the Pacific island nation of Nauru and build a bunker that he could retreat to if a cataclysmic event wiped out at least half of the global population. Never mind, of course, that Nauru—a sovereign country—was never actually up for sale .

A tiny island whose very future may be threatened by climate change may seem like a strange doomsday hideout. Stretching just 8.1 square miles, the country has scarce fertile land and fresh water —a far cry from the lush escape that Bankman-Fried may have envisioned. With so few domestic options, the island’s nearly 13,000 residents must import more than 90 percent of their food, and childhood obesity rates have skyrocketed to some of the highest in the world.

All of these troubles mark a surprising turn for a country that once claimed the world’s second-highest GDP per capita. Nauru is the “world’s richest little isle,” the New York Times proclaimed in 1982, the result of a decadeslong mining rush for the island’s phosphate bounty. But once the mining boom went bust, so too did the money—setting Nauru on a quest for cash that has seen it launder money for the Russian mafia ; effectively imprison refugees seeking asylum in Australia; and, most recently, abandon its long-standing Taiwan ties for Beijing.

None has quite done the trick. Now, Nauru is making one of its most controversial bets yet: mining the seafloor for the mineral treasures powering the global energy transition. It’s a move that has sparked alarm and suspicion, given the island’s checkered history. Yet the many contradictions of Nauru’s path here are as much a twisted tale of exploitation and extraction as they are a story of what one nation will do to survive.

Nauru is “one of the most unique and unusual countries in the world,” said John Connell, a professor at the University of Sydney who studies the South Pacific. “That country has inspired all kinds of strange things to happen, and Sam Bankman-Fried’s one is just a very recent one of a chain of strange activities,” he added.

Workers mine phosphate in Nauru in 1968.

The rise and fall of Nauru’s vast fortune can be traced back to one basic source: bird poop.

Bird droppings may not strike you as even a mildly desirable resource, but they are rich in phosphate , a fertilizer input that underpins the world’s agricultural systems—and Nauru’s land was once covered in the stuff, which accumulated and hardened over millions of years. That natural bounty has long enticed a steady stream of colonial powers—namely Australia, Britain, and New Zealand, which were named as Nauru’s trustees in the aftermath of World War II—that swiftly stripped and then shipped away the country’s phosphate, allocating only a tiny fraction of profits to Nauruans.

Nauru “hasn’t been dealt an easy hand. It’s been exploited in many, many different ways by a whole range of larger powers,” said Cleo Paskal, an expert in the Indo-Pacific region at the Foundation for Defense of Democracies.

Nauru ultimately secured its independence in 1968. But before that point, the three powers had so thoroughly stripped its phosphate deposits that in the early 1960s, Canberra—then charged with administering the country—proposed eventually resettling Nauruans on an Australian island. Nauruans rejected that plan, electing instead to buy back control of their phosphate industry in 1967 and continue extraction; they later took Canberra to the International Court of Justice over the plunder. To this day, phosphate mining has left more than 70 percent of the country uninhabitable, according to the United Nations.

The upside was that money was flooding into Nauru, at one point catapulting the country’s GDP per capita to the second highest in the world as phosphate royalties peaked at 1.7 billion Australian dollars (about $1.1 billion in the United States). The “phosphate economy was booming, and the spinoff was all of this income that was coming into the country,” Connell said. “Unfortunately, most of their investment strategies were bogus.”

Flush with cash, mismanagement and corruption were rampant as officials splurged on ostentatious projects, including financing a failed London musical that fictionalized Leonardo da Vinci’s life; briefly owning what was at the time one of the biggest buildings in Melbourne (“locally referred to as ‘birdshit tower,’” Connell said); and establishing a disproportionately large new airline, the passenger jets of which were later forcibly repossessed by creditors.

Soon, there was no money left. “Once the island was pretty much made bankrupt, there weren’t any other viable economic sectors that had been developed to then continue with,” said Julia Morris, a professor at the University of North Carolina Wilmington and the author of Asylum and Extraction in the Republic of Nauru .

In 2001, Australia offered Nauru a crucial—and contentious—lifeline: Canberra would pay the island to hold and process asylum-seekers who arrive to Australia by boat, effectively remaking the island nation into Australia’s own detention center. In exchange, Nauru would receive a vast sum of money that would ultimately amount to two-thirds of the country’s GDP; in 2021, for example, Canberra paid the island some 40 million Australian dollars (about $26 million) per month to run the facilities.

But the scheme came at a steep human cost, and revelations of the detention center’s dire conditions sparked global outcry, prompting Amnesty International to characterize Nauru as an “open-air prison.” After the facility’s brief closure between 2008 and 2012, in 2016, the Guardian published a trove of leaked documents that shed light on the abuse and assaults rife in the system; according to another report, nearly 90 percent of children held in Nauru faced physical health challenges. Over the years, several refugees have resorted to sewing their mouths shut to protest Canberra’s policy.

Facing immense global pressure, Australia is again winding down its operations in Nauru, although some asylum-seekers are still held on the island, and Canberra continues to pay hundreds of millions of dollars to maintain Nauru’s facilities as a “contingency” plan. For Nauru, that money, alongside revenues from leasing its waters for fishing, has helped prop up its teetering economy as it scrambles for other options.

“The detention center is basically their cash cow at the moment,” said Grant Wyeth, a Melbourne-based political analyst specializing in Australia and the Pacific. “It’s the thing that keeps them alive.”

Taiwanese President Tsai Ing-wen (left) and then-Nauruan President Lionel Aingimea inspect an honor guard during a welcome ceremony outside the presidential palace in Taipei on Dec. 13, 2019. Sam Yeh/AFP via Getty Images

“You’re my bread when I’m hungry; you’re my shelter from troubled winds; you’re my anchor in life’s ocean,” then-Nauruan President Baron Waqa crooned to Taiwanese President Tsai Ing-Wen in 2019 while gently strumming a ukulele that Tsai had gifted him. “But most of all, you’re my best friend.”

It was a touching scene that seemed emblematic of a lasting bond between the two islands—one that Waqa’s successor, President Lionel Aingimea, even likened to that of family. In another sign of Nauru’s allegiance to Taipei, Waqa lashed out at the Chinese delegate to the 2018 Pacific Islands Forum, accusing him of being a “bully” and “insolent” after he “demanded to be heard” during another country’s turn.

“They’re not our friends. They just need us for their own purposes,” Waqa said of the Chinese government. “Sorry, but I have to be strong on this because no one is to come and dictate things to us.” He added: “We’re seeing a lot of big countries coming in and sometimes buying their way through the Pacific, some are extremely aggressive, even to the point that they tread all over us.”

Yet just a little more than five years later, that would all change. In January, the island abruptly abandoned its long-standing ties with Taiwan for Beijing, dealing Taipei a major diplomatic blow after its recent presidential election and further isolating it on the global stage. In a world where governments can covet international recognition more than hard cash or military shipments, Nauru’s shifting loyalties reflect how one of its most precious assets is its diplomatic relationships.

The Hidden History of the World’s Top Offshore Cryptocurrency Tax Haven

The Bahamas represents how global capitalism can go very right, and very wrong, at exactly the same time.

China Is Sweeping Up Pacific Island Allies

Here’s how Washington can fight back.

The Inconvenient Truth of Taiwan’s Indigenous Peoples

Tribal groups assert their own claims on a contested island.

This isn’t the first time the country has harnessed this tool. In 2009, the island announced that it would recognize two Russian-backed breakaway provinces in Georgia, Abkhazia and South Ossetia, in exchange for a $50 million aid package from Moscow.

Like then, bouncing between Taipei and Beijing has helped Nauru rake in more money. When the island first traded its Taiwan ties for Beijing in 2002, for example, the Taiwanese Foreign Ministry alleged that Nauru had received some $137 million from China in the form of a grant and debt repayments.

Yet the shift didn’t last long: Nauru closed its embassy in China just one year later, and by 2005, the two islands had drawn together again. The next year, Taiwan funded Nauru’s purchase of a new Boeing 737 airplane for its national airline after its previous plane—the only one the airline had at the time—was repossessed. And the Brisbane Times reported in 2011 that Taipei was secretly paying top Nauruan officials, including then-President Marcus Stephen and then-Foreign Minister Kieren Keke, 5,000 Australian dollars ($3,200) per month to ensure Nauru’s continued support.

But as Canberra wound down its offshore detention center operations, Nauru was scrambling for more cash. Before announcing its recognition of Beijing, the island reportedly sought around $83.23 million from Taiwan to make up for the financial deficit from the reduction in funding for the Australian facility, according to Taiwan’s Central News Agency . The Nauruan government reportedly cut ties before Taipei responded with its decision.

Aingimea and Chinese Foreign Minister Wang Yi toast after signing a joint communique on the resumption of diplomatic relations between the their countries in Beijing on Jan. 24. Andrea Verdelli/Getty Images

“China has been actively courting Nauru’s political leaders for a long time, and using economic inducements to bring about a change of direction in the country’s diplomacy,” said Taiwan’s Foreign Ministry, later adding that it was “deeply grieved.” The Nauruan government did not respond to Foreign Policy’s request for comment.

Nauru’s shifting allegiance marks the latest success in China’s long-standing strategy of using checkbook diplomacy to win friends and build influence. Across the Pacific, 17 nations now back Beijing —eclipsing the three Pacific nations that still recognize Taiwan—loyalties that China often cultivates by doling out massive sums of money. When the Solomon Islands and Kiribati joined Beijing’s ranks in 2019, for example, China ramped up its loans and investments to the two countries even though its overall Pacific financing has been falling since 2016, according to the Lowy Institute .

In both the Solomon Islands and Kiribati, “sizeable new financing from China has displaced existing support from Taiwan,” the Lowy Institute said in 2022. “China has not given up on using development assistance to cement key relationships.”

Nauru’s cash-strapped government has high hopes for this new chapter of its relationship with Beijing. This change “is in the best interests” of the country , the government declared , and constitutes “a significant first step in moving forward with Nauru’s development.”

Maersk crew members speak to then-Nauruan President Baron Waq and DeepGreen officials in San Diego on April 11, 2018. The Maersk Launcher was then on a mission for DeepGreen to the Central Pacific to advance research for deep-ocean metals. Sandy Huffaker/AP Images for DeepGreen Resources

If all goes to plan, Nauru’s next big moneymaking scheme will see mining companies descend on a remote territory that few have ever reached: the deep sea. Thousands of feet underneath the ocean’s surface , the seafloor is home to an untapped bounty of polymetallic nodules, or rocks rich in the minerals powering the energy transition. And with demand for these minerals primed to explode in the coming decades, Nauru is desperate to dive in—and fast.

“This mining venture is absolutely critical, absolutely critical to Nauru’s economic survival,” said Peter Jacob, a former chief of staff for Nauru’s Office of the President of Nauru who now works at the Metals Company (TMC), a Canadian firm that has been one of the most vocal proponents of deep-sea mining. (Private companies wishing to unlock the deep sea’s riches must first secure a country sponsor; TMC has teamed up with Nauru, Kiribati, and Tonga.)

While countries are free to ransack their own waters , their activity is restricted in the high seas, which are the waters lying beyond nations’ exclusive economic zones. Mining in particular remains prohibited in international waters until the International Seabed Authority (ISA), the governing body established by the U.N. Convention on the Law of the Sea, finalizes the rulebook for the industry—a massive undertaking that involves wrangling a raft of environmental, regulatory, and financial concerns.

Back in 2021, Nauru and TMC got tired of waiting. Eager to begin mining, Nauru invoked a little-known regulatory rule that effectively set a two-year timer for the ISA to determine regulations for the nascent industry. Since the ISA missed that deadline in 2023, countries can now apply for mining licenses in lieu of official guidelines; TMC plans to apply in July 2024.

“The Nauruan government is in pretty struggling financial circumstances, and so [they] are trying to find another long-term economic sector,” said Morris, the University of North Carolina professor. “I think it’s quite appealing in that they won’t be extracting from their land, like with phosphate mining, or from people being held on their land, like asylum.”

Yet in targeting an area of the planet that’s still largely untouched and unexplored, the decision has alarmed hundreds of scientists who warn of irreversible damage in an environment teeming with life and thousands of species that have yet to be discovered . Worried about the environmental risks, more than 20 countries as well as several big automakers—the latter of which rely on the minerals in question to power their electric vehicles—have called for a moratorium until more information is known; others have cast doubt on the financial and technical viability of mining in such unforgiving underwater conditions.

A fisherman is silhouetted at sunset at the northern end of the airport runway on the coast of Nauru on April 15, 2010. Rod Henshaw/Reuters

“Mining the deep sea to solve the climate crisis is like smoking for stress: You’re causing long-term serious harm for very short-term gain,” said Diva Amon, a marine biologist who is part of the Deep-Ocean Stewardship Initiative. “The ocean is our greatest ally in the fight against the climate crisis. It absorbs heat, it sequesters carbon, and it is critical.”

With some $31 billion in earnings on the line over the next 25 years, TMC remains undeterred. The company has funneled at least $100 million into environmental impact assessments and argues that deep-sea mining is both essential for the energy transition and less damaging than onshore mining, despite fierce pushback . The company has played an aggressive, if controversial, role in spearheading the race amid scrutiny of its murky ties with both the ISA and Nauru .

“For a small country such as Nauru, with a relatively small annual government budget, this is going to be transformational,” said Corey McLachlan, the head of stakeholder engagement at TMC. “We would expect to become, if we get up to full operations, probably the largest contributor to Nauru’s GDP.”

On top of its current annual administration fee, McLachlan said, the island will receive a fixed payment for every ton of nodules recovered from mining. Nauru Ocean Resources Inc., TMC’s deep-sea mining subsidiary, has also committed to paying corporate income tax in Nauru, which currently stands at 25 percent. Mining revenues will go into a seabed minerals fund, which the Nauruan government is committed to ensuring will be “governed in a transparent way,” he said.

Elsewhere in the Pacific Ocean, where climate change threatens the very survival of low-lying islands , Nauru’s push has proven divisive. While Tonga and the Cook Islands also want mining to begin, a growing number of nations—including Palau, Fiji, Vanuatu, the Solomon Islands, Papua New Guinea , Samoa, and the Federated States of Micronesia—are pushing for more time. “How can we in our right minds say ‘let’s go mining’ without knowing what the risks are?” Palau President Surangel Whipps Jr. asked in June 2022.

“This is the cradle of life, and we don’t want to be guinea pigs,” French Polynesian President Moetai Brotherson told Islands Business . “We’ve been guinea pigs for the nuclear tests, and we don’t want to be guinea pigs for deep-sea mining if it goes full scale before the technology is ready.”

Nauru, though, apparently feels as if it has nothing left to lose.

“We don’t see any way forward for us in terms of economic development” without deep-sea mining, said Jacob, the former chief of staff who is now at TMC. While some other countries may have plans to relocate residents to other countries such as Australia or New Zealand, he said, Nauruans “don’t have that opportunity.”

“We are staying here,” he said.

Christina Lu is a reporter at Foreign Policy . Twitter:  @christinafei

Join the Conversation

Commenting on this and other recent articles is just one benefit of a Foreign Policy subscription.

Already a subscriber? Log In .

Subscribe Subscribe

View Comments

Join the conversation on this and other recent Foreign Policy articles when you subscribe now.

Not your account? Log out

Please follow our comment guidelines , stay on topic, and be civil, courteous, and respectful of others’ beliefs.

Change your username:

I agree to abide by FP’s comment guidelines . (Required)

Confirm your username to get started.

The default username below has been generated using the first name and last initial on your FP subscriber account. Usernames may be updated at any time and must not contain inappropriate or offensive language.

More from Foreign Policy

Why china is rooting for trump.

Beijing’s long game would be much better served by the candidate’s policies and the divisions he would unleash.

How Primed for War Is China?

Risk signals for a conflict are flashing red.

How Policymakers Should Handle a Fragmenting World

A top IMF official on avoiding the worst-case scenario of a new economic cold war.

The ‘Biden Doctrine’ Will Make Things Worse

The White House is developing plans for the Middle East that are too ambitious for its own good.

Modi’s India Is One Step Closer to a Contentious Goal

What the red sea crisis reveals about china’s middle east strategy, how the u.s. can rein in israel, alexei navalny wanted to make russia a ‘normal country’, america is a heartbeat away from a war it could lose, the devastation of gaza was inevitable, nato’s silver lining playbook, when economics and great-power foreign policy collide, ukraine’s war of art, russian opposition leader alexei navalny dies in prison, navalny’s death shocks world leaders in munich.

Newsletters

Sign up for World Brief

FP’s flagship evening newsletter guiding you through the most important world stories of the day, written by Alexandra Sharp . Delivered weekdays.

The 2008 housing bust suggests China's only halfway through its property crisis. Here's how the downturns compare.

  • The 2008 US housing bust suggests China is only halfway through its current downturn, Goldman Sachs said.
  • China could see further declines in prices, housing starts, and new home sales, the bank said.
  • The 2008 crisis differs from China's, but policymakers must similarly work to prevent contagion.

Insider Today

The 2008 US housing market crash stands as one of the worst collapses in economic history — and its lessons remain relevant as China deals with its own real estate crisis .

Beijing is facing a narrow policy path toward an economic rebound this year, and the International Monetary Fund has warned that the country is in the midst of a historic property downturn matched only by the most severe collapses of the last three decades .

In a February 12 note, Goldman Sachs analysts warned that once a housing market deteriorates, it takes a long time to bottom — a lesson that was illustrated in the US subprime mortgage catastrophe.

"We estimate that real house prices in China declined 16% from the peak in 2021Q3 to 2023Q3," Goldman analysts said. "If the US experience is of any guidance, we are only halfway through the downward price adjustment in the current housing downturn."

Goldman said home prices in the US peaked in 2006 at roughly 40% above fair value. Yet that "expensiveness," as determined by population, income, vacancies, and other metrics, remains far below what China faces today. 

No bottom in sight

As things stand, China's housing downturn that began in mid-2021 still has no end in sight, according to Goldman Sachs.

Housing starts and new home sales in the country have dropped 64% and 52%, respectively, since peaking at the end of 2020, and analysts expect the country's inventory glut to keep both variables depressed for several years.

For context, US real house prices peaked in early 2006 and bottomed in 2012. Then, US homeowner vacancy rates peaked in 2008 and did not fall back to their long-term average until a decade later.

Beijing did take action on high home prices in 2016 by tightening mortgage requirements and imposing other restrictions, which were effective in the short term. The pandemic, however, reversed those efforts. Price growth accelerated, and trouble emerged for key developers like Country Garden and Evergrande.

Goldman's derived measure of China's real house prices has only dropped by half as much as the US saw during its six-year collapse, as the chart shows below.

"[O]verly loose mortgage lending standards and too much mortgage debt, which were at the center of the US subprime crisis, do not apply in China," Goldman analysts said. "Instead, overly high house prices, which are rooted in the unique land supply mechanism, are the reason behind many economic distortions. Put differently, while the property problem in the US turned into a financial problem, the property problem in China is fundamentally a fiscal problem that needs to be addressed."

Spillover effects

Goldman analysts maintained that Beijing must prioritize keeping contagion effects contained from the rest of the economy.

The US subprime crisis spilled over into the wider financial sector via products known as collateralized debt obligations, which amplified the impact of widespread mortgage defaults. Foreclosures soared as homeowners couldn't afford to pay off or refinance their mortgages, which lowered house prices further.

For China to prevent a similar spiral, Goldman said Beijing must implement forceful policy measures to support local governments and banks, and ensure the delivery of pre-sold homes. 

"Absent such decisive actions, negative spillovers are likely to prolong the economic damage of the housing downturn," the analysts said.

how to solve financial crisis in a country

Watch: Jim Chanos explains the most important asset class in the world

how to solve financial crisis in a country

  • Main content

What is quantitative tightening and what happens when the Bank of Canada stops it?

The central bank may halt the program sooner than expected, some economists say

Article content

The Bank of Canada could wind down its quantitative tightening program as soon as April and will most likely do so no later than June, an economist at the Royal Bank of Canada predicted in a report this week. The program, through which the central bank reduces assets on its balance sheet, is a form of monetary tightening that works on top of interest rate hikes to curb inflation. Here’s what you need to know about quantitative tightening and what a halt to the program means for the economy.

Subscribe now to read the latest news in your city and across Canada.

  • Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, Victoria Wells and others.
  • Daily content from Financial Times, the world's leading global business publication.
  • Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.
  • National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.
  • Daily puzzles, including the New York Times Crossword.

Create an account or sign in to continue with your reading experience.

  • Access articles from across Canada with one account.
  • Share your thoughts and join the conversation in the comments.
  • Enjoy additional articles per month.
  • Get email updates from your favourite authors.

Sign In or Create an Account

What is quantitative tightening and what happens when the bank of canada stops it back to video, how did we get here.

During the Great Financial Crisis, central bankers around the world pulled out all the stops to prevent economic collapse. That meant using monetary policy tools that had never before been used at scale, including so-called quantitative easing (QE), through which central banks bought huge quantities of certain kinds of bonds. The purchases essentially increased the quantity of money in circulation and reduced the volume of outstanding bonds, supporting prices. It was a new kind of accommodative monetary policy, but the result was that central banks wound up holding billions worth of assets on their balance sheets. At the peak in February 2021, the Bank of Canada held about $570 billion in assets on its balance sheet. Peak holdings of Government of Canada bonds were about $440 billion.

So what is quantitative tightening?

Quantitative tightening, as the name suggests, is the reverse of this process. Instead of buying up bonds, the central bank sells them — or lets them run off without replacing them. Whereas quantitative easing encourages spending and investment to stimulate the economy, the goal of quantitative tightening is to help pull back that extraordinary support by reversing the purchases. To that end, quantitative tightening complements the policy interest rate, which influences short-term borrowing costs. It removes a source of downward pressure on interest rates which isn’t needed when the economy is doing well. The Bank of Canada said this helps bring demand and supply back into balance and inflation back toward its two per cent target. In the same way that quantitative easing sends a signal to the public about the bank’s intention to keep its policy interest rate low for an extended period, quantitative tightening indicates that interest rates are likely to rise, it said.

When did QE turn to QT?

Canada’s central bank began to allow assets to roll off its balance sheet on April 25, 2022, about one month after its first interest rate hike in March 2022. In remarks last March, Bank of Canada deputy governor Toni Gravelle laid out the expected timeline for the program: “As for the question of when QT will end, this will likely occur sometime around the end of 2024 or the first half of 2025,” he said. But indicators in short-term funding markets have led analysts to speculate that the move will be accelerated, especially if the bank starts cutting interest rates. Notably, Gravelle also said the bank planned to employ a “floor system” in which it would keep a relatively small amount of government bonds on its balance sheet going forward — somewhere in the range of $20 billion to $60 billion.

What stage are they at now?

Its latest quarterly financial report shows that as of Sept. 30, 2023, the central bank held total assets of $323.6 billion. That was down 25 per cent from $432 billion in the same period the prior year. In a report this week, RBC’s Canadian rates strategist Simon Deeley suggested the bank would likely return to a “stable balance sheet policy” in conjunction with its April 10 rate decision. That means it would have to resume buying bonds to replace those coming due. At the latest, the tightening phase will end when the central bank decides to cut rates, which RBC expects will happen in June.  

— With additional reporting from Bloomberg

• Email: [email protected]

Clarification: The Bank of Canada is not selling bonds as part of its QT program — it is only allowing bonds that come due to roll off its balance sheet. An earlier version of this story incorrectly indicated bond sales played a part in the program.

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here .

Postmedia is committed to maintaining a lively but civil forum for discussion and encourage all readers to share their views on our articles. Comments may take up to an hour for moderation before appearing on the site. We ask you to keep your comments relevant and respectful. We have enabled email notifications—you will now receive an email if you receive a reply to your comment, there is an update to a comment thread you follow or if a user you follow comments. Visit our Community Guidelines for more information and details on how to adjust your email settings .

Why market bets on interest rate cuts are slipping

What you should be doing for your 2023 tax return right now, posthaste: canadians jump back into variable mortgages in bet on 'short-term pain for long-term gain', can this man solve canada's housing crisis, td bank to pay $16 million to settle insufficient funds class-action lawsuit.

This website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here . By continuing to use our site, you agree to our Terms of Service and Privacy Policy .

how to solve financial crisis in a country

how to solve financial crisis in a country

  • Identify the Problems. The first step to overcoming financial crisis is to identify the primary problem that is causing difficulties. ...
  • Create a Budget. One of the best ways to deal with financial problems is creating a budget plan. ...
  • Set Financial Priorities. ...
  • Address the Problem. ...
  • Develop a Plan and Track Progress.

How can a country avoid financial crisis?

How can we solve financial crisis, what are three things countries can do to minimize the probability of being hit by a severe international financial crisis, what saved the 2008 recession, what is the solution for recession, what role does the imf play in financial crisis, what is an international financial crisis, how does the financial crisis affect developing countries, who is to blame for the great recession of 2008, did people lose money 2008, what was the root cause of the global financial crisis in 2008.

To avoid crises, a country needs both sound macroeconomic policies and a strong financial system. A sound macroeconomic policy framework is one that promotes growth by keeping inflation low, the budget deficit small, and the current account sustainable.

  • Maximize Your Liquid Savings. ...
  • Make a Budget. ...
  • Prepare to Minimize Your Monthly Bills. ...
  • Closely Manage Your Bills. ...
  • Take Stock of Your Non-Cash Assets and Maximize Their Value. ...
  • Pay Down Your Credit Card Debt.

Countries can minimize the likelihood of a severe international financial crisis by adopting and maintaining credible and sustainable fiscal and monetary policies.

1 By September 2008, Congress approved a $700 billion bank bailout, now known as the Troubled Asset Relief Program. By February 2009, Obama proposed the $787 billion economic stimulus package, which helped avert a global depression. Here is an overview of the significant moments of the Great Recession of 2008.

To avoid a recession, the government and monetary authorities need to try and increase aggregate demand (consumer spending, investment, exports). There is no guarantee that they will work. It will depend on the policies and also the causes of the recession.

The IMF helps member countries facing economic crisis by offering loans, technical assistance, and surveillance of economic policies. Money to fund the IMF's activities comes from member countries that pay a quota based on the size of each country's economy and its importance in world trade and finance.

The global financial crisis (GFC) refers to the period of extreme stress in global financial markets and banking systems between mid 2007 and early 2009. ... Many banks around the world incurred large losses and relied on government support to avoid bankruptcy.

The current financial crisis started in developed countries, but reduced foreign investment and reduced demand for imports of commodities and labour-intensive products are having profound effects on developing countries.

For both American and European economists, the main culprit of the crisis was financial regulation and supervision (a score of 4.3 for the American panel and 4.4 for the European one).

It would be a massive understatement to say that 2008 had a few folks who lost big in the stock market. The year was full of sob stories, from homeowners being forced out, to everyday investors seeing their 401(k)s shrink, to millions of Americans losing their jobs.

The financial crisis was primarily caused by deregulation in the financial industry. That permitted banks to engage in hedge fund trading with derivatives. Banks then demanded more mortgages to support the profitable sale of these derivatives. ... That created the financial crisis that led to the Great Recession.

how to solve financial crisis in a country

Salem Five Direct Review - Online Bank With Solid Checking, CD

how to solve financial crisis in a country

Living on a Boat Year Round - Is It Possible? (Pros

how to solve financial crisis in a country

How to Improve Public Speaking Skills and Overcome Your Fear

IMAGES

  1. A Simple Guide to Navigate through a Financial Crisis

    how to solve financial crisis in a country

  2. Premium Vector

    how to solve financial crisis in a country

  3. Visualizing the Financial Crisis

    how to solve financial crisis in a country

  4. Global financial crisis

    how to solve financial crisis in a country

  5. PPT

    how to solve financial crisis in a country

  6. Global Financial Crisis: Causes, Consequences and Impact on Economic

    how to solve financial crisis in a country

VIDEO

  1. Special DUA FOR MONEY, INCREASE YOUR INCOME AND WEALTH AND SOLVE Financial Problems

  2. Debt crisis could cause recession: How it impacts you

  3. How can we solve financial problems to build wealth? MASTER INVESTOR #shorts

  4. Wazifa To Solve Financial Crisis

  5. GLOBAL FINANCIAL CRISIS

COMMENTS

  1. Solutions to Financial Crisis

    E.g. Greece bond crisis. Exchange rate crisis - rapid fall in the value of exchange rate. Often problems are related. In a recession, government borrowing tends to rise, an economic crisis can lead to a fiscal crisis. In the case of Ireland, the banking crisis got absorbed by the government leading to the fiscal crisis. Options for the ...

  2. What can we do to prevent another global financial crisis?

    The global economy faces a number of complex challenges from technological change and globalization, and the lingering effects of the 2008-9 financial crisis. At the same time, we are witnessing lower levels of trust in the core institutions that have helped to deliver tremendous growth and prosperity over the past 40 years.

  3. Facing Crisis Upon Crisis: How the World Can Respond

    As a result, we will be projecting a further downgrade in global growth for both 2022 and 2023. Fortunately, for most countries, growth will still remain in positive territory. That said, the impact of the war will contribute to forecast downgrades for 143 economies this year—accounting for 86 percent of global GDP.

  4. Helping Countries Cope with Multiple Crises

    The situation calls for fast action, both to support Ukraine's people and to ensure ongoing, robust support for low- and middle-income countries as they deal with these multiple crises. As Malpass outlined at a ministerial roundtable during the meetings, the Bank Group has quickly mobilized more than $3 billion for Ukraine - inclusive of ...

  5. Solving the low-income country debt crisis: four solutions

    In this blog, based on a forthcoming report, I argue that there are four actions that need to be taken urgently if this brewing crisis in many low-income countries is to be resolved. 1. Boost alternatives to borrowing. Low-income countries face major public financing shortfalls to meet even basic public expenditure needs.

  6. Financial Crisis: Possible Solutions / Next Steps

    The current financial crisis has highlighted the growing importance of the "shadow banking system," which grew out of the securitization of assets and the integration of banking with capital market developments. This trend has been most pronounced in the United States, but it has had a profound influence on the global financial system.

  7. How to Avoid International Financial Crises and the Role of the ...

    9. The IMF plays its role in stabilizing the international financial system through crisis prevention and crisis mitigation. IMF surveillance, technical assistance, and information provision, contribute to the prevention of crises. IMF lending in support of a country's adjustment program contributes to the mitigation of crises. 10.

  8. Four ways to tackle developing countries' debt distress

    3 The international financial institutions should continue pursuing financial innovations that may generate additional low-cost finance for countries facing debt distress. One possibility is a programmatic approach to writing down a country's debt in return for agreeing to climate commitments.

  9. Confronting the Crisis: Priorities for the Global Economy

    What Needs to be Done: a 4-Point Plan. My next point is about building the bridge to recovery. We see four priorities: First, continue with essential containment measures and support for health systems. Some say there is a trade-off between saving lives and saving livelihoods. I say it is a false dilemma.

  10. Real Solutions to the Financial Crisis

    For more detail on our solutions to the financial crisis and our analysis of the problems, please go to the Housing page of our website. The positions of American Progress, and our policy experts ...

  11. Financial Crisis: How Every Country Handles It

    Financial crises are often linked to market jitters, i.e., market anxiety, in which investors may sell some or all of their assets or take out money from their savings accounts to cover debts. It may have an effect on the economy of a country, region, or throughout the world. Market jitters are contagious, they can spread very quickly.

  12. How to Fix the U.S. Financial Crisis

    The U.S. economy has built up too many imbalances—consumer debt, overextended construction, impaired capital of banks—to avoid an economic downturn and a major retrenchment of the banking ...

  13. How to deal with the global financial crisis and promote the economy's

    The immediate priority of macroeconomic policies and bank support schemes is to promote the economy's recovery and preserve price and financial stability. Yet, a fundamental policy objective should be that the recovery of activity and the repair of the financial system have to be achieved in a manner that will ensure a sustained growth ...

  14. PDF Preventing Financial Crises in Developing Countries

    country vulnerable to financial crisis, and prudent policies are the first line of defense. In the presence of large capital inflows and weak financial systems, however, the room for maneuver in set-ting appropriate macroeconomic poli-cies to control excessive private bor-rowing and risk taking is constrained because of the presence of numerous

  15. 10 Ways to Prepare for a Personal Financial Crisis

    Some insurance companies might give you an extension, so look for the steps involved and be prepared. 4. Closely Manage Your Bills. There's no reason to waste money on late fees or finance ...

  16. PDF How to Solve the Global Economic Crisis

    To overcome this synchronized financial crisis, decisive and concerted efforts are needed. Major fiscal stimulus packages are proposed around the world to complement monetary policy. Last December, the IMF suggested a stimulus of 2 percent of global GDP, equivalent of about $1.2 trillion a year.

  17. Are Developing Countries Facing a Possible Debt Crisis?

    It certainly does insofar as the prospects a developing country debt crisis have increased. In the past few years, 11 countries have already defaulted, while another 48 (or 54, depending on the credit rating agency you use) are in or at high risk of debt distress, as shown by the combination of bond spreads, private credit rating agency ...

  18. How the world economy learned to love chaos

    C entral banks have embarked on austere monetary policy to crush inflation. Worries about the financial system, from bond markets to commercial property to the health of the banks, are ever ...

  19. Explainer-How Bad Is Pakistan's Debt Crisis and Can the IMF Save It?

    A $3 billion programme from the International Monetary Fund (IMF) runs out next month and securing a new and much bigger one is widely seen as the priority for the new administration.

  20. How not to solve a financial crisis

    The aftermath of the financial crisis generated a zero-sum view of the world that in particular transformed the visions of Xi Jinping and Vladimir Putin, but then spilled over more broadly into a new geopolitical discourse. The Great Depression was a lasting example—a negative model—of how not to do it.

  21. Can this man solve Canada's housing crisis?

    Not, mind you, by grabbing a hammer and banging away on the 3.5 million new units that Canada Mortgage and Housing Corp. estimates the country will need by 2030 — on top of what's already being built — but by pitching potential solutions to the country's housing mess to a slew of different audiences.

  22. Winter 2024 Economic Forecast: A delayed rebound in growth amid faster

    Last year's modest growth largely owes itself to the momentum of the post-pandemic economic rebound in the previous two years. Already towards the end of 2022, the economic expansion came to an abrupt end and activity has since been broadly stagnating, against the background of falling household purchasing power, collapsing external demand, forceful monetary tightening and the partial ...

  23. Cost of living crisis: global impact and solutions

    Here are some of the human impacts of the cost of living crisis - and what countries are doing to help. The economic impacts of the Russian invasion of Ukraine are rippling out across the globe in a cost of living crisis that's pushing millions more people into poverty. Soaring food and energy prices have resulted in 71 million people in ...

  24. Three Steps to Avert a Debt Crisis

    Three policy priorities can help make a difference. First, greater efforts are needed to ensure that sovereign borrowing is financially sustainable. Borrowers should carefully set their fiscal spending and deficit plans to keep public debt on a sustainable path. They should also consider closely potential returns on their projects and their ...

  25. Can Deep-Sea Mining Save Nauru's Economy?

    The upside was that money was flooding into Nauru, at one point catapulting the country's GDP per capita to the second highest in the world as phosphate royalties peaked at 1.7 billion ...

  26. US Vs. China Economy: How 2008 Bust Compares to Housing Crash Now

    Housing starts and new home sales in the country have dropped 64% and 52%, respectively, since peaking at the end of 2020, and analysts expect the country's inventory glut to keep both variables ...

  27. Quantitative tightening and what happens when Bank of ...

    Article content. The Bank of Canada could wind down its quantitative tightening program as soon as April and will most likely do so no later than June, an economist at the Royal Bank of Canada predicted in a report this week. The program, through which the central bank reduces assets on its balance sheet, is a form of monetary tightening that works on top of interest rate hikes to curb inflation.

  28. Tourshabana

    how to solve financial crisis in a country. Identify the Problems. The first step to overcoming financial crisis is to identify the primary problem that is causing difficulties. ... Create a Budget. One of the best ways to deal with financial problems is creating a budget plan. ... Set Financial Priorities. ...