Credit Crunch Towards Downturn

During the credit crisis, Lehman Brothers is among the primary major banks to collapse. In 2007, some individuals had heard of the so-called credit crunch, but nowadays the phrase has just invaded the dictionaries and more people become familiar with it.

Generally, credit crunch is referred as the severe credit or money shortage. The beginning of the said phenomenon has been recognized on 9th August 2007, in which bad news coming from BNP Paribas, a French bank, triggered intense rise in the credit cost, as well as made the world of finance realize how significant the situation is.

A lot of analysts connect the recent crisis with the sub-prime mortgage firm, wherein US banks provide high risk loans to individuals with not-so-good credit histories. These along with other bonds, assets and loans are bundled with portfolios or the so-called (CDO) and provided to several investors worldwide.

Credit Crunch towards DownturnThe rise of interest rates and the fall of prices of houses lead to great numbers of persons, who fail to repay their loans and mortgages. Many investors suffer failures and losses, leading them to be reluctant to obtain more CDOs. The credit markets had freeze while banks become hesitant to lend money within each other, devoid of knowing the process of numerous bad loans that can be included with their competitor’s books.

The crisis’ impact in the sub-prime mortgage is easily illustrated to include implications beyond America. Several losses are experienced by banks, particularly investment banks, as far as Australia. Most companies cancel bonds’ sales, which are worth billion dollars of money, according to market conditions.

The European Central Bank and US Federal Bank attempted to bolster some money markets by means of enabling funds accessible for banks in order to borrow within more advantageous terms. Hence, interest rates are cut with an endeavor to promote lending ventures. On the other hand, the short term aid does not resolve the crisis in liquidity or the cash availability in banks. Since banks stay cautious regarding lending money with one another. The lack of credit of people, banks and companies bring with them the recession threat, bankruptcies, job losses, towering rise of living costs, as well as repossessions.

Meanwhile, Northern Rock, a UK bank, looks for an emergency loan in order to stay afloat that prompt a “run” for the bank. With this, worried depositors withdraw £2 billion. Afterwords, the bank is nationalized. Within the United States, the Bear Stearn’s that almost collapse leads to confidence crisis with the financial sector as well as the investment-only banks’ end. The US government seeks to have a long-term solution and agrees a bail-out of $700 billion, which will buy up the bad debts of Wall Street in exchange for stakes within the banks. Also, the US government intends to borrow some amount of money from financial markets worldwide, and dreams it can give-out the “distressed assets” back, only if the housing market has been established.

On the other hand, the government of United Kingdom launches its unique bail-out, ensuring £400 billion extra capital accessible to eight largest building societies and banks in the UK in exchange for preference shares within them. In exchange for its set of investments, the UK government anticipates obtaining a stake within the banks; even though, how much exactly is not nearly clear yet

By: Arif Anees

Article Directory: http://www.articledashboard.com