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Author(s): Vesna Prorok

Journal: Zbornik Radova Ekonomskog Fakulteta Istočno Sarajevo
ISSN 1840-3557

Volume: 5;
Start page: 221;
Date: 2011;
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Keywords: the real estate market | mortgage loans | rating agencies | securitization | mortgage-backed securities | financial system | the global economic crisis | Greece's debt crisis

This paper analyses the currentfinancial crisis of global proportions and Greece’s debtcrisis, their generation, causes and effects which thesetwo crises have left on both financial and real sector,primarily of USA and Europe. The global financial crisisoriginated in the subprime mortgage market as a result ofmassive approval of mortgage loans even to those clientswho were not financially capable to service them withinthe predicted period. Such very bad mortgage loanapproval regulation showed the first signs of weakness atthe moment when a significant number of mortgagorswere no longer able to pay their loans off. As a result ofnot being able to repay their debts, real estate which wasin the debtor’s property is now handed over to the bankswhich, in an effort to provide liquidity, are being forcedto sell them at significantly lower prices than the onesthey had at the time of loan approval. In order to stop theenormous losses which banks have suffered, primarily asa result of bad loans, and in order to provide additionalbank liquidity, the resort was converting mortgages intomortgage-backed securities with government guarantees.Rating agencies highly evaluated these securities, for thesimple reason that the securities had a state coverage, sothat the banks, institutional investors and others boughtsuch high-rated mortgage-backed securities, notsuspecting the wrong assessment of the relevant ratingagencies. With this “bad assessment” the rating agencieshave only deepened the crisis and contributed to its rapidexpansion to the rest of the world through financialmarkets. The losses that are now becoming huge, havereached the great number of participants in the financialmarket, and a problem that is proven to be the systemicone is gradually spilled over to the real sector. The crisishas caused and provoked other crises that have been“warming up” for decades in America as well as inEurope, such as the debt crises which recently haveemerged in EU members. Debt crisis that has engulfedGreece, which is discussed about in the paper, is a resultof internal and partly of external factors. The crises ofthe same character threaten Spain, Portugal, Ireland andItaly.
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