The Global Credit Crunch

The worst crisis since the great depression
1929

During the last two years the world finance
markets where in constant trouble, which
ended up in a world wide collapse of the
finance sector. The crisis derived its origin
from the lowering of the US prime rate to 1.0
% in 2003. This lowering was intended to
stimulate the American economy, but it also
encouraged citizens with low incomes to take
out loans. Many of those credits where used
to buy houses. The economic cool down 2005
in the USA and the increase of the prime rate
to 5,25% in June 2006 caused a chain
reaction. Many households weren’t able to
pay their loans anymore and tried to sell their
houses. This ruined the prices in the housing
market. As a result many of those Subprimecredits
suffered from a serious depreciation.
In the end the housing market collapsed and
lead to a liquidity crisis among the finance
sector. In 2008 this crisis took effect all over
the world because the finance market was
extensively interlocked. The aftermath of this
crisis will expand successively to other
economic sectors. What does this mean for
national economies? Which challenges will
occur for governments to provide an
economic recession and do they have the
resources to do that? Analysing the effects
on a small country like Macedonia, we will
see in which ways the national economy
could suffer from the credit crunch and, if
possible, the alleviation of its impact.

Quick facts:
GDP growth (first half 2008):
about 6%
Inflation (first half 2008):
7,1%
(Source: Source: Ministry of
Economy of Republic of
Macedonia)

Macedonia’s Challenges

The main impact of this world wide crisis on Macedonia will not primarily occur in
the bank sector but in the export economy. More than half of Macedonia’s exports
are produced in metal plants and sold to Western Europe. With a decreasing demand
of metals, like in the western automobile industry, the metal manufacturing sector
will experience a serious decline in prices. Also the textile industry as the second
biggest in Macedonia will be afflicted with lower demand on the world market. This
contributes to the already very high trade deficit of more than 2 billion dollars this
year. Furthermore this development will entail a cutback in work force.
The global recession will also reduce the foreign
investments in Macedonia, which will have a
serious backlash on the stock exchange. Without
further foreign investment the structural
problems of the country’s economy will persist
and Macedonia will also slide in economic
recession.
Concerning the savings of Macedonian citizens in
bank accounts, there were no signs of a threat to
those savings like after the break up of
Yugoslavia.
A Possible Response
While facing a crisis of a world wide scale there are still some things that can be done
on a national level. On the part of the government many industrial leaders demand
official help, like tax cutbacks. In this way tax payers will keep their jobs, the
industry argues. During the SEE Summit in Ohrid at the 20th of November steps in
that direction were already be announced. With a high unemployment rate of about
30 % Macedonia can not afford to jeopardise employment among its export sector.
On part of the Macedonians there is little to do then try to keep the money in
circulation. Putting the money under a pillow to save it will be harmful on both
counts banking and
retailing.