The global financial crisis of 2008-2009 commenced in July 2007 when a loss of confidence by investors in the value of mortgages in the United States resulted in a liquidity crisis that prompted a substantial injection of capital into financial markets (Felton & Reinhart, 2008). On August 9 2007, the world financial capitals were shocked when the European Central Bank injected €95bn worth of funds into the money markets to prevent borrowing costs from spiralling sharply (Tett, 2008). In September 2008, the crisis worsened, as stock markets worldwide crashed and entered a period of high volatility, and a considerable number of banks, mortgage lenders and insurance companies failed in the following weeks (Felton & Reinhart, 2008).

A year later, there is still no sign of these problems letting up. Instead, the burden of pressure on banks has risen so sharply, that by some measures this is now the worst financial crisis in 70 years (Tett, 2008).

Background

The cause of the financial was due to cheap money that encouraged rapid growth: between 2004 and 2007, the world economy expanded at its fastest rate in 30 years (Giles, 2008). Over the past year, meanwhile, brisk global economic growth finally hit capacity constraints. Demand for commodities and food continued to exceed supply, forcing prices harshly higher, raising inflation and further undermining spending capacity in advanced economies (Tett, 2008).

Jehoma (2008) cites that sub-prime mortgage lending in US, reversal of the housing boom in other industrialised economies and poor regulation of financial markets as the cause for the global financial crisis. These factors were further compounded by the high food prices and oil prices Jehoma (2008).

This crisis in real estate, banking and credit in the United States had a global reach, influencing a wide range of financial and economic activities and institutions, including the tightening of credit with financial institutions; financial markets that experienced steep declines; liquidity problems in equity funds and the depreciation and devaluation of the assets underpinning insurance contracts and pension and provident funds leading to concerns about the ability of these devices to meet future obligations (Felton & Reinhart, 2008).

The impact of the crisis was not confined only to financial markets, but overflowed to all sectors of the global economy, with some industrialised countries experiencing deep recessions (Jehoma, 2008). The effect on the wider economy has been profound and several organisations have gone bankrupt, or have had to be bailed out, and thousands of jobs have been cut (Giles, 2008).

IMPACT OF GLOBAL ECONOMIC CRISES ON SOUTH AFRICA

The dramatic downward revision of the United States of America’s growth prospects led to a similar trend all over the world.

South Africa has joined the long list of economies in recession – the country’s first recession in 17 years. The market had expected a decline, but the result was far worse than most forecasts (France24, 2009).

Statistics South Africa reported that South Africa’s gross domestic product (GDP) growth rate for the first quarter of 2009 stood at -6.4 percent quarter-on-quarter, seasonally adjusted and annualized; compared with a -1.8 percent contraction in the fourth quarter of 2008 (South Africa.info, 2009). Two successive quarters of negative growth denotes that an economy is theoretically in recession.