Global Credit Crunch

Overview of the Global credit crunch

The ripple effect took place since the mortgage crisis in the United States. The US credit crunch went global and has been one of the worse. Banks in Europe along with mortgage lenders, and all the other financial institutions experienced the crisis. Most banks are connected and merged therefore it was bound that the crisis was going to extend abroad. At present, subprime losses around the world exceed $150 billion. European Banks such as IKB Deutshe Industriebank, Deutshe Bank, BNP Paribas, and NIBC have experienced the first wave of the ripple where billions were lost from the subprime department when the credit crunch occurred in the U.S. At the same time, the Dutch Bank NIBC lost over $180 million. Asia is soon to be under the knife regarding defaults in lending. U.S. bond insurers made exchanges as well in Asia. Banks that have invested into the U.S. mortgage market are bound to lose millions or billions of dollars. To lessen the crisis the Federal Reserve and other international banks such as the Central Bank in Japan gave over $30 million to the U.S. banking system. When the stocks went down in the U.S. due to the credit crunch so did the stocks in Europe an in part of Asia such as Japan, and South Korea.

The signs of the credit crunch in Europe started in September, 2007 after the collapse of the World’s Stock Market. It was somehow predicted due to the credit cycle and its history. European companies who had low credits were starting to be rejected by financial institutions when asking for loans. Loans were on hold in Europe due to the coming crisis. Mortgage companies no longer had easy access to money. The bad loans though still remained in the system. In early September, Mortgage companies in the United Kingdom such as Victoria Mortgages which was the first to fall into the turmoil and had 381 customers on hold. The Mortgage company like in the U.S. sold loans to unreliable borrowers.

European central banks were still not safe and were still holding the U.S. debt since U.S. bonds were bought. The start of the crisis in Europe affected the economy such as unemployment and the housing market going downhill and loosing customers. Asia was also affected in that area. On the 14^th of September 2007, another important British mortgage company called Northern Rock was financial stalled since it could not increase financing due to the credit crisis. The Bank of England responded to the event by giving money. The two events sparked a downturn for Europe where interest rates were bound to decrease, especially another decrease in the World Stock Market which followed shortly after the Northern Rock’s cry for help. The Bank of England warned for inflation due to the rapid change in interest rates.

Dark October 2007 is when banks experienced tremendous losses. UBS in Zurich lost 382 million Euros in result of mortgage crisis. Soon after, on October 5^th Merill Lynch experiences a loss of $4,500 millions. This loss affected all the banking systems related around the world. The 11^th of October, Russia’s central bank decreased its interest rates. Spain along with the U.K. experiences the mortgage crisis since its banks such as BBVA, and Banco Sabadell invested and lent loads to higher risk mortgages with higher interest rates. The Spanish Alert announced by the Spanish Prime Minister of Finance announces a slowed down growth of the economy for 2008. Growing unemployment, higher interest rates, and indebt Spanish householders is predicted. Near the end of October, the U.S. Federal Reserve lowers the interest rates by 4.5 %.

November 1st is when the Federal Reserve pumped $41 billions to Banks in order to allow them to borrow at a lower rate. This transaction of Money by the Federal Reserve was the most important since 911. Citigroup Turing the same month loose their CEO. Banks since September that have been trying to back up their securities regarding the loans and mortgages have lost over $30 Billions. Insurance companies are starting to panic. The American International Group, the world’s largest insurance company lost a large portion of its earnings due to the default loans. The financial institutions are experiencing a reduction in their capital. In the meanwhile, The U.K. predicts a downward change in its economy. The house market is in trouble since it cannot barrow as much as it could. Less spending among the population will occur which will slow the pace of the economy. The Banks have become vigilant with their movements of loans. On the other side the oil barrel is costing $ 94 and food prices are increasing in the U.S. and the majority of the E.U. countries, which predicts future inflation. Germany is approaching its elections and the decision regarding taxes is launched. Cuts in tax rates are preferred and the abolishment of the special tax for the Rich is soon to end. In conclusion, consumer spending in Europe is predicted to slow down.

December 2007, a harsh winter regarding the credit cycle. A freeze over the mortgages imposed by President Bush is limiting the movements of mortgages. Japan is starting to become more attentive to the global crisis since its economy relies largely on consumption. The subprime-mortgage crisis will eventually have an impact over the Japanese companies and profits will be affected. Nevertheless, Japan’s capital continues to prosper. The Bank of England reduces the interest rates from 5.75 % to 5.5 %. On the hand, The U.S. could fall into a recession if the mortgage crisis continues to rise. On December 12th, Central Banks such as the Bank of Canada, Swiss National Bank, the European Central Bank, and the Bank of England collaborated in “Easing the Liquidity Squeeze.” Furthermore the Bank of England decided to give 20 billion pounds in a period of 3 months to the money markets. The Central Banks goals are to straighten out the money markets. The engagement made by the central banks is nevertheless a threat to the world economy since it is taking the money from the economy rather than the banks itself due to a lock down. The banks can be held responsible for a downturn in capital and liquidity of the countries. Borrowing is also harder therefore halting companies from adding to the capital.

January is a difficult month for China, and is under the pressure of the ripple effect hitting the Chinese central banks due to the default mortgages and increase credit risks. Australia could also become the next victim since they have to pay a higher price to borrow money from international markets. For the past decade, Australia has been borrowing from international financial institutions including the U.S. The Australian credit growth also ranks as third in the world. On January 12^th, the U.S. Federal Reserve auction $ 30 Billions worth of funds to the banks at an interest rate of around 3%. The Billions auctioned are in all hope to calm down the credit crisis and avoid recession.

February remains another worry and the Federal Reserve is still injecting money to the banks hoping the ease the problem. The economy seems to weaken in the U.S. and soon in Europe. Inflation is a result if the money market and banks continue to head downwards. The Credit Markets have still not reached that safety zone and in the long run bankruptcy along with recession could happen in the year 2008. Not to forget that Oil also plays an important key role because oil prices can increase for the next two years therefore the economies of the Americas and Europe will be damaged first fairly quickly. Credit Suisse announced on February 19^th, a $2.85 billion mistake. Customers are bound to be lost regarding Credit Suisse. On the bright side, BNP Paribas France, and Barclays from the U.K. have agreed to work together in fixing and recuperating the subprime assets.

Giverny Lowe

The Causes of Credit Crisis

Blog 1 – The causes of the credit crisis – you will need to look in the months of July to September 2007.

The causes of the credit crisis are linked to different factors. The crisis first started in the United States where its economy had been pretty stable over the past decades. The crisis in the U.S. was sparked by the mortgage crisis for homes. Houses in the U.S. are on sale at their lowest costs. Loans were borrowed constantly and numerous debtors never met the responsibilities or requirements of the agreement made on “subprimes.” The loans were at a higher risk therefore the consequences were bound to be harsh. The rate for the share of subprime mortgages signed up by many Americans was high and led to believing that financing for the buyer of loans was to be easier to pay for in shorter terms. Although a turning point occurred when house prices suddenly started shooting down after 2006 and on. When the prices for houses go down, covering the debt becomes uneasy since an increase of people started to buy loans without really applying to them legally also known as defaults. Defaults increased so high that it reached around $300 billon in credit affecting directly the lenders of mortgages who had no real safety regarding possible crisis. In the U.S. Mortgage payments are broadly used now days and there are consequences such as citizens not being able to meet their payments or the rates for mortgages increases. When house prices go down, refinancing is not met and therefore a credit crisis occurs being part of the economic cycle. When loans suddenly become more expensive it is known as a credit crunch. Due to the decline in the house prices, banks and borrowers make the access to buying loans more difficult and set them at a higher rate. A prediction of America’s economy was negative therefore banks took action in putting some restriction and security regarding the loans in order not to hinder the banking system which involves the rest of the world. Interest rates are raised as well as a result and first by the main central bank affecting all others. The credit crisis spread as banks work together internationally. It is like a ripple effect started first in the U.S. For instance, recently the UBS Swiss bank in Zurich for the first time faced a full year net loss resulting from the loss of 18 billion dollars in the US subprime mortgage crisis.

Another factor is weak monetary policies within the central banks. Lending became too easy and now banks are trying to straighten up and strengthen the policies. Which is why lending today is difficult. Globalisation also plays an important key role since banks are all inter connected causing a ripple effect. Therefore everyone suffers in the end. As illustrated above how Zurich lost a lot of money after the U.S. Central banks also went wrong by keeping the interest rate at a low rate too low to recover any losses. The low interest rates from 2001 to 2003 helped nourish to house market. But the consequences had to occur where borrowers find themselves in debts and lenders not being able to lend as much as they could. Central banks also lacked responsibility regarding the financial changes in their systems. Banks emphasized on inflation and other short terms outcomes rather than long term outcomes such as losses due to credit. The only reaction is to increase rates. Liquidity risks were also not taken into strict account.

Numerous investors issue loans to people. Going through lenders is easier since they are high risk takers and do not require as much as a bank would. If the asset of what the mortgage is covering decreases in price then losses will occur for the banks and investors. An important key component to credit crisis that occurred in the U.S. was partially do to lending to an important part of the population and the immigrants such as African Americans, Mexicans, and others. They applied for mortgages not knowing the consequences which led to serious debts. Those populations were not properly informed about the risks and rules and often apply for them thinking that they will make enough money the pay it back since most of them have a small allowance.

Before credit losses occurred the economy was doing well such as low inflation, increase house prices and other increasing positive factors led lenders to take higher risks. The outcomes were too good at one point and due to the credit cycle had to fall straight down. In conclusion, a lesson has been learned for the future.

Giverny Lowe