GLOBAL FINANCIAL RECESSION

Current Ongoing Global Financial Recession and Its Impact on International Businesses

Current Ongoing Global Financial Recession and Its Impact on International Businesses

Introduction

The current economic recession had started in August 2007 due to the number of different reasons that affect the overall business activities to large extent. This economic downturn had severely affected the business firms including Small and Medium Enterprises (International business) by reducing their operations. The sources of financing were also largely affected due to the economic downturn that includes the changes in the trade credit etc. In this paper, we have tried to find out the impact of recession on International business while putting its main focus on the trade credit.

Financial Recession

The global financial crisis of 2007 was comparatively recent in origin as compared to other financial crises, and is possibly persistent until now. Is the credit crisis a good natural experiment? As the answer to this question is important for understanding t he empirical methods in this paper, I will discuss the pertinent features of the credit crisis in depth. The credit crisis refers to the panic ill financial markets ill August 2007. It was triggered by increasing defaults on subprime mortgages and the disruption of the markets for mortgage-backed securities (Covitz, 2009, 58).

Brunnermeier (2009, 77) describes the events that hit the US financial markets as a force of nature as credit markets ceased to function completely in August 2007. Bhardwaj and Sengupta (2008, 65), provide evidence of large increases in loan spreads, tightening lending standards and cancellations of credit lines starting in August 2007. They further highlight those important sources of corporate financing such as commercial paper, bond placements, bank loans and secondary equity issuance shut down during the 2007 crisis. Bernanke (2010, 98) documents the implosion in the CDO market in the second half of 2007. Overall, the facts suggest the developments in financial markets in 2007 represented a negative shock to the supply of credit available to firms (Bernanke, 2010, 98).

Sources of Finance during Economic Downturn

Different sources of financing have been used by the businessmen for the financial support to their business. There is no significant difference in the sources of financing during normal times and economic downturn. However, the access of the businessmen to the financial markets during the economic downturn is very limited that makes them to borrow heavily. The sources that are usually used by the businessmen for financing their business activities are the bank loans, Small Business Administration (SBA) loans, venture capital, angel investing are all the sources of financing (Kaplan, 1997, 169).

Ashcraft and Schuermann (2008, 14) argues that the recent problems in credit markets did not result in whole scale re-pricing of risk (i.e. affected all markets). Instead, the pressures in certain markets (i .e. commercial paper) resulted from liquidity problems. On the other hand, Benmelech and Dlugosz (2009, 14) argues that the credit crisis was not as dramatic a shock to corporate credit as others have ...