(Reuters) – Markets have experienced massive upheaval in the last month, prompted in part by two of the three largest banking failures in U.S. history while Swiss lender Credit Suisse was bought by rival UBS Group AG in a merger engineered by Swiss regulators. Fears of banking contagion remain, and investors are worried that global […]
Factbox: The biggest financial crises of the last four decades
(Reuters) – Markets have experienced massive upheaval in the last month, prompted in part by two of the three largest banking failures in U.S. history while Swiss lender Credit Suisse was bought by rival UBS Group AG in a merger engineered by Swiss regulators.
Fears of banking contagion remain, and investors are worried that global economies will suffer if the effects of higher interest rates torpedo more lenders. Here is a rundown of some of the biggest financial crises in the last 40 years:
U.S. SAVINGS AND LOAN CRISIS
Over 1,000 savings and loan (S&L) institutions were wiped out in the crisis that unfolded throughout the 1980s, resulting in up to $124 billion in costs to taxpayers.
The upheaval was rooted in the unsound real estate and commercial loans made by S&Ls after the United States removed interest-rate caps on their loans and deposits, which allowed them to take on more risk.
JUNK BOND CRASH
After nearly a decade of supercharged growth, the junk bond market slumped in the late 1980s following a series of interest rate hikes by the Federal Reserve.
Michael Milken had helped popularize the financial instrument, with many using it as a way of funding leveraged buyouts. But supply eventually outpaced demand, and the market tanked. Milken was charged with securities and reporting violations. He paid a $200 million fine and served a 22-month sentence in jail.
MEXICAN PESO CRISIS
In a surprise move in December 1994, Mexico devalued its currency, the peso, after the country’s current account deficit grew and its international reserves declined. The country ended up getting external financial support from the International Monetary Fund and a $50 billion bailout from the United States.
ASIAN CURRENCY CRISIS
A massive outflow of capital from Asian economies in the mid-to-late 1990s put pressure on the currencies in the region, necessitating government support.
The crisis kicked off in Thailand, where authorities had to devalue the Thai baht after months of trying to defend the currency’s peg to the dollar drained its forex reserves. The contagion soon spread to other markets in Asia including Indonesia, South Korea and Malaysia.
Global bodies, including the International Monetary Fund and the World Bank, had to step in with rescue packages amounting to more than $100 billion for the economies.
LONG TERM CAPITAL MANAGEMENT (LTCM)
The highly leveraged U.S. hedge fund lost more than $4 billion in a span of a few months in 1998 following the Asian crisis and a subsequent financial crisis in Russia. The fund had a huge exposure to Russian government bonds, and took major losses after Russia defaulted on its debt and devalued its currency.
The New York Federal Reserve Bank helped broker a $3.5 billion private-sector bailout for LTCM and the Federal Reserve cut interest rates three times in successive months.
GLOBAL FINANCIAL CRISIS OF 2008
The biggest financial crisis since the Great Depression was rooted in risky loans to shaky borrowers, which started to lose value after central banks raised interest rates in the period leading up to the crisis. Many companies had taken big positions in highly leveraged mortgage bonds that had proliferated in previous years.
The crisis led to the collapse of some storied Wall Street giants including Bear Stearns and Lehman Brothers, both of whom had large positions in mortgage securities. The debacle also engulfed insurance giant American International Group, which needed a $180 billion bailout. The U.S. government closed Washington Mutual, in what was largest-ever failure of a U.S. bank. The “Great Recession” that resulted was the worst economic downturn in 70 years.
EUROPEAN DEBT CRISIS
Spurred by the 2008 financial crisis, surging debt at some of the major European economies led to a loss of confidence in the region’s businesses.
Greece was among the hardest hit as its primary industries of shipping and tourism were economically sensitive. It was the first to be bailed out by other euro zone economies. Portugal, Ireland and Cyprus also were rescued from default, and unemployment surged, particularly in the countries bordering the Mediterranean Sea.
Sources: Central bank reports, media reports
(Reporting by Niket Nishant in Bengaluru; Editing by David Gaffen and Matthew Lewis)
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