Top 10 most devastating financial crises: A look back

The recent global stock market turmoil amid the coronavirus outbreak has left investors panicked and worried. The S&P 500 index has dropped more than 12% in the last couple of weeks. This is nothing compared to what we (and our ancestors) have seen in the past. Here we take a look at the most devastating financial crises that wreaked havoc through modern history.

The financial markets reflect the irrationality, optimism, and panic of market participants. Sometimes extreme optimism causes asset prices to disconnect from the reality, only to fall dramatically when the bubble bursts. Examples include the Tulip Mania (1637) and the South Sea Bubble (1720).

These are the top 10 most devastating financial crises:

10- Argentine economic crisis, 1999

Much like other Latin American nations, the Argentine economy was hit hard by the Latin American debt crisis in the 1980s. Its forex reserves were running low. The rampant corruption, sky high inflation, military dictatorship, and the Falklands debacle drove the Argentine economy to the verge of collapse.

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The steep devaluation of the Brazilian currency in 1999 hurt Argentine exports. Soon the Argentine economy was in full-blown recession that lasted three years. Following the dramatic run on banks, the government froze everyone’s bank accounts. Violent protests erupted all over the country. In the absence of cash, people bartered for goods. Two consecutive governments failed to bring the economy out of recession. It took Argentina three years to recover from the crisis.

9- Russian financial crisis, 1998

Five years prior to the financial crisis, Russia issued GKOs – inflation-free treasury bills – to fund its budget deficit. The GKOs attracted a huge number of foreign investors because of high interest rates. The government was using proceeds from GKO sales to pay off interest on existing debts.

But the Russian economy continued to struggle due to corruption, political instability, and lack of economic reforms. The falling oil prices also hit the Russian economy hard. The government owned more than $12 billion in unpaid wages to employees. In 1997, Moscow tried to raise more money by selling GKOs with interest rates of up to 200%!

Eventually, investors lost confidence in the Russian economy, selling the rubles and other Russian securities en masse. The markets tanked more than 60%. Many banks vanished within weeks. The Russian central bank used its forex reserves to stabilize the ruble, but couldn’t. Even an IMF loan proved ineffective. Russia emerged from the crisis when oil prices started rising in 1999.

8- The 1987 crisis

On October 19, 1987, the US stocks tumbled 22.6% in what is now known as Black Monday. No one is entirely sure what caused the Black Monday, but it wiped out hundreds of billions of dollars from the stock markets. By the end of October 1987, the Australian stocks fell 42%, Hong Kong stocks went down 46%, and the UK stocks fell 26.4%.

Some believe the Black Monday crash was caused by the growing influence of computers on the Wall Street. Others blamed monetary policy and inflation. Following the 1987 crisis, many of American’s leading savings & loan entities such as American Savings and Loan, Gibraltar Savings and Loan, and MCorp collapsed.

7- German hyperinflation, 1918-24

The German hyperinflation was not as bad as the Zimbabwe hyperinflation, but it was one of the most devastating financial crises in history. After the First World War, the ‘victors’ blamed Germany for starting the war. They demanded retributions for the cost of war. Whatever land, precious metals, and other assets Germany had wasn’t enough to cover the cost of war.

So, Germany started printing Mark like never before. The exchange rate skyrocketed from 4 German Marks per dollar in 1914 to 1 trillion Marks per dollar in 1923. Inflation was running high. Many countries accused Germany of deliberating sabotaging its economy to avoid the financial retributions of war.

The country tried to control the hyperinflation in 1923 by introducing a new currency called the Rentenmark. It destroyed the middle-class and paved the way for National Socialism in Germany.

6- Asian financial crisis, 1997

During the early 1990s, the Asian Tigers – Thailand, South Korea, Hong Kong, Malaysia, Singapore, and Indonesia – had become the hottest investment destinations. Developed countries were pouring billions of dollars into the region. Asset prices shot through the roof. Some of these countries were clocking annual GDP growth rates of above 12%.

Favorable exchange rates made their exports less competitive. Amid extreme optimism, investors failed to notice that the Asian Tigers were also running huge fiscal deficits. The Asian Tigers began facing fierce competition from China in the export market in 1996. The massive debts and falling exports hurt these economies. Panicked investors from developed countries withdrew credit. The asset prices started falling, leading to massive debt defaults.

The crisis began in Thailand and quickly spread to other countries. Regional currencies fell dramatically against the dollar, making dollar-denominated borrowings even more expensive. The International Monetary Fund launched a massive bailout program to help Asian countries bring their economies back on track.

5- OPEC oil crisis, 1973

The United States was sending arms and supplies to Israel during the Fourth Arab-Israel War. The OPEC nations retaliated by stopping the export of oil to the US and its allies. As a result, oil prices jumped significantly in developed countries.

Inflation was running high and the economic growth had stagnated. The NYSE lost $97 billion in value within six weeks. Japanese automakers started selling smaller and more fuel-efficient cars to compete with the American gas-guzzlers.

The oil embargo lasted only five months. But the Arab nations realized the power of oil in the global economy. The US had to enact several regulations to conserve oil. In 1977, the US government created the Department of Energy to build a strategic petroleum reserve.

4- Japan’s Lost Decade, 1991-2000

The Japanese economy witnessed a strong growth after the Second World War, thanks to the country’s high savings rate and sheer hard work. By the 1980s, Japan had become the world’s second largest economy behind the US. Japan was the world’s largest exporter of goods.

The booming economy and record-low interest rates brought prosperity. Consequently, the stock market and real estate valuations shot through the roof in late 1980s. At one point, the Japanese Imperial Palace was worth more than the entire real estate in California. It all ended in 1990s when the speculative bubble burst.

In the 1990s, the Japanese stock market lost more than $2.2 trillion in value while the real estate market declined by more than $8 trillion from the peak. It was a slow rather than a sudden decline. Borrowers failed to repay debts backed by speculative assets. The stock market and real estate bubble burst led to a decade of low growth as the economy stalled. The country is still struggling with low growth and deflation.

3- Dot-com bubble, 2000

Between October 1990 and March 2000, the S&P 500 index gained 417%. Investors had just realized the potential of the Internet Age. The rally was fueled by tech stocks. Even many non-tech companies were adding ‘.com’ to their names to attract investors’ money. In March 2000, the NASDAQ reached a peak market capitalization of $6.6 trillion. Most of the technology companies didn’t have a viable business model back then.

The NASDAQ started declining in March 2000. By 2002, investors lost an estimated $5 trillion as hundreds of technology companies vanished into thin air.

2- The Great Recession, 2007-2009

It was the most devastating financial crisis since the 1929 Great Depression. On the back of low interest rates, excessive leverage, and subprime mortgages, the US housing market was on steroids between 2002 and 2007. People with low or unstable income were able to buy exorbitantly expensive houses with zero down payments.

It was only a matter of time before the borrowers started defaulting on their loans. The S&P 500 index plunged 56.8% between October 2007 and March 2009. It wiped out more than $6.5 trillion from the US stock markets. The effects were felt all over the world. Several financial services giants including Lehman Brothers, Washington Mutual, and Bear Stearns collapsed during the Great Recession. The US government launched unprecedented bailouts to revive the economy.

1- The Great Depression, 1929

The Great Depression was the most devastating financial crisis in modern history. Prior to the 1929 crash, American experts and economists predicted that the country had entered an era of ‘permanent prosperity.’ People were borrowing money to invest in the booming stock market. Countless middle-class people had turned millionaires.

Investors panicked when the government raised interest rates. On October 29, 1929, investors lost more than $10 billion ($95 billion adjusted for inflation). Within a week, the stock market had lost about $30 billion in value, which was even more than what America had spent on the First World War.

Between 1929 and 1932, the US stocks lost 86% of their value. The Great Depression lasted about a decade. More than one-third of American banks collapsed during the crisis. In 1933, the US government established the Federal Deposit Insurance Corporation (FDIC) to restore people’s faith in the American banking system.

Millions lost their jobs. Unemployment rate reached 25% in 1933. Billionaires went bankrupt. The stock market did not reach its 1929 peak again until 1954.