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High leverage and sustainability problems

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High leverage and sustainability problems

High public and private debt ratios and inability to service them have pushed states and businesses internationally to the brink of bankruptcy or even bankruptcy.

Argentina is one of the countries that has been forced to suspend payments in modern history. A country with great natural wealth that experienced a dictatorial regime until 1983 and long periods of political instability. Excessive foreign borrowing and failed monetary policies (such as the decision to establish a stable exchange rate between the dollar and the country's currency) and inflation-holding policies have left the country unable to meet its obligations to bondholders.

In a similar situation, European and other countries were in danger of resorting to the Support Mechanism and the International Monetary Fund in order to avoid the risk of default. High, unmanageable, public debt ratios, deficits, market exclusion (and therefore inability to refinance debt and finance deficits) and the need to support the financial sector due to bad debts and capital needs were the main causes of the crisis. started in 2008 by America, with the collapse of the market for structured products.

The collapse of the Lehman Brothers along with the “Black Monday” of 1929 when American stock markets collapsed creating panic will go down in history as two of the darkest days of the world economy.

The loose, and in some cases non-existent, supervision of investment banks such as Lehman Brothers combined with the unlimited credit expansion that fueled corporate profits, temporarily, and bank gratuities led to the great collapse.

The global financial crisis started with the purchase of structured products in the United States and quickly spread to the rest of the world. What was required in the case of these structured products was that instead of assessing the risks arising from mortgages for credit rating, the rating agencies ranked these special purpose investment schemes in the same category as the banking institution that created them.

When the US real estate market declined significantly, the derivatives issued had lost much of their value, triggering margin calls and investing banks such as Lehman Brothers to find huge exposures and needs. in liquidity.

The specific organization when it asked for state support found closed doors. In addition to the fact that, for better or worse, the collapse of this organization was assessed as manageable, the then US government wanted to send a clear message that it is not prepared to take on, at the expense of the taxpayer, the bad practices and arrogance of any banker.

In addition to Lehman Brothers, organizations that once moderated, such as Carillion, Northen Rock, General Motors, Barings Bank, Chrysler, Wrightbus, Northern Ireland's largest employer, Thomas Cook, and Laiki Bank, were exposed to the financial crisis. , highlighting the inability of managers to manage risk and high leverage.

Governments and creditors depending on the systemicity of each organization proceeded to the rescue (bail out) and restructuring of some of these organizations. Of course, the first priority was the removal of the administrations.

It is important to note that these collapses are not only due to the economic environment in which they operated and the economic crisis, but also to the structural changes and problems that the organizations themselves had.

Thomas Cook is another victim of high leverage and its inability to adapt to new data in the travel market and to the new habits of its customers. In 2007 the agency's decision to merge with MyTravel in order to deal with the emerging competitors mentioned above resulted in more than ενός 1 billion being written off from the balance sheet.

One of the biggest bail outs that will also go down in history is the $ 10 billion support to Dubai World to meet its obligations, including four billion in Nakheel Islamic bonds given by the neighboring United Arab Emirates state of Abu Dhabi.

In recent weeks, there has been talk of the viability of perhaps China's largest construction group, Evergrande, based in Shenzhen, a city built in recent years from scratch with major technology companies and bordering Hong Kong by road. while several of its citizens may have invested in Cyprus as well.

This group is having difficulty as it seems to meet its obligations due to high debt that exceeds 300 billion euros. The high yields it offered on the bonds it issued create an unbearable burden, while the reduction in real estate demand and the rising construction costs aggravate the situation. According to reports, there are delays in the payments of suppliers and employees, and towers that have been left in the frames.

Source: politis.com.cy

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