Most analysts link the current credit crisis to the sub-prime mortgage business, in which US banks give high-risk loans to people with poor credit histories. These and other loans, bonds or assets are bundled into portfolios – or Collateralized Debt Obligations (CDOs) - and sold on to investors globally
Falling house prices and rising interest rates lead to high numbers of people who cannot repay their mortgages. Investors suffer losses, making them reluctant to take on more CDOs. Credit markets freeze as banks are reluctant to lend to each other, not knowing how many bad loans could be on their rivals‘ books
The impact of the sub-prime mortgage crisis is quickly shown to have implications beyond the United States. Losses are felt by investment banks as far afield as Australia. Firms cancel sales of bonds worth billions of dollars
The US Federal Bank and the European Central Bank tries to bolster the money markets by making funds available for banks to borrow on more favorable terms. Interest rates are also cut in an effort to encourage lending.
But the short-term help does not solve the liquidity crisis - or availability of cash for banks - as banks remain cautious about lending to each other. A lack of credit - to banks, companies and individuals - brings with it the threat of recession, job losses, bankruptcies, repossessions and a rise in living costs.
UK BANK NORTHERN ROCK SEEKS AN EMERGENCY LOAN TO STAY AFLOAT, PROMPTING A &quot;RUN&quot; ON THE BANK, AS WORRIED CUSTOMERS WITHDRAW £2BN. THE BANK IS LATER NATIONALISED. IN THE US, THE NEAR-COLLAPSE OF BEAR STEARNS LEADS TO A CRISIS OF CONFIDENCE IN THE FINANCIAL SECTOR AND THE END OF INVESTMENT-ONLY BANKS.
SEEKING A LONG-TERM SOLUTION, THE US GOVERNMENT AGREES A $700BN BAIL-OUT THAT WILL BUY UP WALL STREET'S BAD DEBTS IN RETURN FOR STAKE IN THE BANKS. THE US GOVERNMENT PLANS TO BORROW THE MONEY FROM WORLD FINANCIAL MARKETS AND HOPES IT CAN SELL THE DISTRESSED ASSETS BACK ONCE THE HOUSING MARKET HAS STABILISED.
THE UK GOVERNMENT LAUNCHES ITS OWN BAIL-OUT, MAKING £400BN EXTRA CAPITAL AVAILABLE TO EIGHT OF THE UK'S LARGEST BANKS AND BUILDING SOCIETIES IN RETURN FOR PREFERENCE SHARES IN THEM. IN RETURN FOR ITS INVESTMENT, THE GOVERNMENT EXPECTS TO GET A STAKE IN THE BANKS - ALTHOUGH EXACTLY HOW MUCH IS NOT QUITE CLEAR YET.
ECONOMIES AROUND THE WORLD ARE AFFECTED BY THE CREDIT CRUNCH. GOVERNMENTS MOVE TO NATIONALISE BANKS FROM ICELAND TO FRANCE. CENTRAL BANKS IN THE US, CANADA AND SOME PARTS OF EUROPE TAKE THE UNPRECEDENTED STEP OF CO-ORDINATING A HALF-POINT PERCENT CUT IN INTEREST RATES IN AN EFFORT TO EASE THE CRISIS.
SHARES HAVE RISEN AND FALLEN WITH NEWS OF FAILURES, TAKEOVERS AND BAIL-OUTS. IN PART, THIS REFLECTS INVESTORS' CONFIDENCE IN THE BANKING SYSTEM. WHILE BANK SHARES HAVE BEEN HAMMERED BECAUSE OF BAD DEBTS, RETAILERS HAVE BEEN HIT AS CONSUMER CONFIDENCE IS SHAKEN BY FALLING HOUSE PRICES AND JOB INSECURITY.
SUB-PRIME MORTGAGE, THE NEW NAME IN FINANCIAL TOWN