Financial Crisis

A situation that arises when financial instability becomes so severe that the nation's financial system is unable to function. A financial crisis usually involves a banking crisis, a currency crisis, and a foreign debt crisis.

The most recent financial crisis, also known as the Global Financial Crisis (GFC), was triggered by the bursting of the United States' housing bubble which peaked in 2007. The bursting of the U.S. housing bubble caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally. Questions regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined. Governments and central banks responded with unprecedented fiscal stimulus and austerity measures. In the U.S. the government provided a large stimulus package to keep the financial sector from completely collapsing, while many European countries were forced to adopt austerity measures where they cut government spending and increased taxes.