Financial instability and systematic consequences of consolidation is a universal phenomenon which is likely to overcome the whole financial system.

It involves a wave of liquidation or bankruptcy spreading rapidly through out the financial systems with plunging asset prices, slides developing in real sectors and the high probability of products' price deflation.

This issue is not only to bankers and business communities but also to ordinary people in the street. How to manage a financial instability and prevent severe and dangerous crises of the developing countries may push millions of people to the verge of poverty.

This is rather a daunting task for some reasons. First financial instability is an innate feature of international financial markets. It is global and systematic. However, the international community is powerless to establish an effective institution and mechanisms at a global level to decrease the crises and manage them when they occur. The responsibility has been placed on the shoulders of developing countries to take care of themselves. But the developing countries are more prone to financial instabilities and their ability to counter this problem is limited.

Financial Instability is characterized not only as short term instability in exchange, financial and real asset prices but also by the bang in the economic activity and living conditions. In currency markets the main problem is not daily or weekly instability of exchange rates but by the gyrations where the currencies moved from one level to another in rapid turnaround. This has become a common feature in stock and property markets.

This boom had made stock prices to rise to levels that are not justified by long term earning of firms.  In the property market the price explosion is due to over production which eventually leads to breaks and surplus. The Bombay stock exchange soared up by 1000 points within four trading sessions and then on the fifth day dropped by about 1500 points goes to show the level of instability.

Financial instability and capital market explosions also contribute to excessive investment in certain industries such as information technology in East Asia and during the dot.com in the United States. This rise have become more often in the credit market too which is likely to go up and down with the equity and property prices.

In a world of financial instability, every country with an open capital account and is directly incorporated into the global financial system whether they be developed or developing, creditor or debtor is prone to startling and unexpected change in the external value of its currency. But in industrial countries financial instability and systematic consequences of consolidation rarely occurs in domestic capital and credit markets. For example, during the EMS crisis in 1992, there were drastic drops in lira and pound sterling but it did not affect the financial position in Italy and in the United Kingdom.

The financial instability and systematic consequences of consolidation can be solved by certain financial rules and regulations. These rules and regulations should be designed to enlarge or widen the space for growth and financial stability of developed and developing countries. It should not sustain unsound economic and monetary postures that were before. It is clear that capital controls are no answer when the underlying policies are not sustainable.

Jerome Cedicci is renowned Real Estate Developer in USA; Robin Trehan is an M&A Expert. He can be reached at rtrehan@creditcapitalfunding.com