CRISIS

MANAGEMENT IN
GLOBAL BUSINESS
BY- TANEESHA RATHI
PRN- 22021321145
INTRODUCTION
Crisis management can be defined as a set of
precautions or factors designed to fight crises and
to lessen the actual damage caused by it. Crises
management in business is the responsibility of the
owner to cope with the disaster’s impact on the
stakeholders and their company’s value. One such
example of the financial crisis is the 2007-2008
Global Financial Crisis. It was the worst economic
disaster which took place after the Stock Market
Crash of 1929. It started with subprime mortgage
lending crisis in 2007 and ended with the fall of
the investment bank Lehman Brothers in 2008.
This led to the 2008 Great Recession. Below is a
graph which shows us that the worst hit crisis on
the world GDP is the 2007-2008 crisis.

TYPES OF CRISIS
Bank Crisis
When a bank suffers a sharp increase in depositor
withdrawals, it is said to be run on. Because banks
lend out most of the cash they receive in the form
of deposits , it is difficult to pay back all deposits
quickly when suddenly demanded, leaving banks
insolvent and customers You will lose your
deposit. deposit. However, this is limited to cases
where it is not covered by a deposit guarantee.
The event of a widespread bank run is called a
systemic banking crisis or bank panic. Banking
crises usually follow a period of risky lending and
subsequent loan defaults.

Currency Crisis
Currency crises, also known as currency
devaluation crises, are generally regarded as part
of the financial crisis. Kaminsky et al. (1998), for
example, define currency crises as occurring when
the weighted average of monthly percentage
exchange rate depreciations and monthly
percentage declines in foreign exchange reserves
exceeds its mean by more than three standard
deviations. Frankel and Rose (1996) define a
currency crisis as a nominal currency depreciation
of at least 25%, but it is also defined as at least a
10% increase in the rate of depreciation.
Generally, a currency crisis can be defined as a
situation in which participants in the foreign
exchange market realize that a fixed exchange
rate is about to fail, causing speculation against
the fix that accelerates the failure and forces a
devaluation.

Speculative bubbles and crashes

A speculative bubble exists in the event of a large,
sustained overpricing of an asset class. One factor
that often contributes to a bubble is the presence
of buyers who purchase an asset based solely on
the expectation that they can later sell it at a
higher price, rather than calculating the income it
will generate in the future. If a bubble occurs,
there is also the risk of asset prices falling: market
participants will only buy as long as they expect
others to buy, and when many decide to sell, the
price will fall. However, it is difficult to predict
whether an asset's price will actually match its
underlying value, and it is difficult to reliably
identify a bubble.
Some economists argue that there will be no or
very few bubbles.

Black Friday, May 9, 1873, Vienna Stock Exchange.

The Panic of 1873 followed by a long depression.
Well-known examples of bubbles (or perceived
bubbles) and bursts in stocks and other assets are
the 17th-century Dutch Tulipmania, the 18th-
century Nankai bubble, the 1929 Wall Street
crash, and the Japanese real estate market. It's a
market bubble. 1980s. The bursting of the US
housing bubble, 2006-2008.In 2000, the real
estate bubble occurred, and the price of real
estate as an asset rose significantly.

International Financial Crisis

Countries with fixed exchange rates suddenly
forced to devalue their currencies as
unsustainable accumulation of current account
deficits case, it is called a currency crisis or a
currency crisis. balance of payments crisis. When
a country cannot pay its debts, it is said to be
bankrupt. Both devaluations and defaults can be
voluntary government decisions, but are seen as
involuntary consequences of changes in investor
sentiment leading to a sudden cessation of capital
inflows or a sudden increase in capital outflows.
often

Several currencies that were part of the European

Exchange Rate Mechanism suffered a crisis in
1992-1993, forcing them to devalue or withdraw
from the mechanism. In 1997/98 another
currency crisis occurred in Asia. Many Latin
American countries went into default in the early
1980s. The 1998 Russian financial crisis led to the
devaluation of the ruble and the default of
Russian government bonds.
CAUSES OF FINANCIAL CRISIS
Strategic complementarities in financial markets
It is often observed that successful investing
requires each investor in the financial market to
guess what other investors will do. George Soros
called this need to gauge the intentions of others
"reflexivity." Similarly, John Maynard Keynes
compared the financial markets to a beauty
pageant game in which each participant tries to
predict which model the other participants will
find the most beautiful.

Moreover, in many cases investors have

incentives to coordinate their choices. For
example, a depositor at IndyMac Bank who
expects other depositors to withdraw their funds
may expect the bank to fail and therefore also has
an incentive to withdraw. Economists call the
incentive to imitate the strategies of others
strategic complementarity.

It has been argued that self-fulfilling prophecies

can occur if people or firms have a strong enough
incentive to do the same as they expect others to
do. For example, if investors expect the yen to rise
in value, this may cause its value to rise; if
depositors expect the bank to fail, it may cause
the bank to fail. Therefore, financial crises are
sometimes seen as a vicious circle in which
investors avoid an institution or asset because
they expect others to do so.

Leverage
Leverage, meaning borrowing to finance
investment, is often cited as a contributing factor
to financial crises. When a financial institution (or
an individual) only invests their own money, at
worst they can lose their own money. However,
when he borrows to invest more, he can
potentially make more on his investment, but he
can also lose more than everything he has.
Leverage therefore increases potential investment
returns, but also creates the risk of bankruptcy.
Since bankruptcy means that a firm fails to make
all of its promised payments to other firms, it can
spread financial difficulties from one firm to
another.

The average degree of leverage in an economy

often rises before a financial crisis. For example,
borrowing to finance stock market investments
was increasingly common before the Wall Street
Crash of 1929.

CONCLUSION
The global financial crisis requires some special
attention as it’s causes, consequences, effects,
aftermaths directly affects the financial position of
the world’s economy. Other crisis such as
Personnel Crisis, Organisational Crisis,
Technological Crisis, Natural Crisis, Confrontation
Crisis, Workplace Violence Crisis , Crisis of
Malevolence should also be given same
importance as these factors also play a crucial role
in the management of business.