In Japan’s case, the failure of a mid-sized securities house to honor its inter-bank obligations triggered severe dislocations in the money market, which spread instantaneously to the wider segment of Japan’s financial markets. Similarly, the collapse of Lehman Brothers in September 2008 caused acute liquidity seizure, thereby shattering the confidence chain in the global financial markets and clogging credit flows between lenders and borrowers.
Although the States slashed their investment activities faced with revenue deficit from 1987-88, their debt and debt servicing burden soared with the high cost borrowing financing current expenditure amidst growing fiscal imbalances during 1986-87 to 1997-98. Fiscal imbalances worsened after 1998-99 following a sizeable pay hike of the employees in sequel to the implementation of the Fifth Pay Commission’s recommendations at the State level.