Credit Crunch Arrives To Bite Gordon
With less than a week to go now until Gordon’s last ever budget speech (hopefully at least), nobody can have failed to notice the sharp slide in share prices that has reverberated around the trading floors of the world this week. Traders in London today particularly noticed, as over 150 points were wiped off the FTSE 100 leaving it teetering on the brink of the key psychological 6000 barrier.
The cause of these upsets, it seems, is a crisis of confidence in the sub-prime mortgage lender sector of the US economy, and the wider economy in general. One of the biggest sub-prime lenders, New Century, is now effectively out of business, and a whole bunch of others are lining up to follow suit. Obligingly, one enterprising blogger and former New Century employee has decided to post up his inside story of the company, and that will doubtless be worth watching over the next few days and weeks as more is revealed.
The headache for Gordon is that the bad news can’t realistically be contained just to the US. New Century’s biggest investor was none other than Barclays Bank, a name best known as one of the big four retail banks in the UK, who have been buying up Mortgage Backed Securities from other banks in an effort to increase their asset base for Basel II. One supplier of those securities it seems was New Century, and it now looks like Barclays is about to lose a whole heap of cash as the deal has turned sour. This news follows pretty soon after HSBC, another big bank in the UK, ran into trouble with its US subprime lending unit as well.
When the US economy hits trouble, and it starts costing UK banks money and threatens to hit the UK economy as a whole, you can expect the lending industry over here to sit up and take notice. Those 110%, 35 year, 5 times salary mortgages may not look quite so appealing to Abbey and the rest just now, as it becomes clear they fall right into the sub-prime category that is beset with so many difficulties in the US. And when those deals gradually dry up, the overall credit environment tightens, robbing Gordon of the “economic growth” by debt based inflation that he has been so proud of over the last 10 years. It may be too early to say that a Credit Crunch has arrived in Britain, but risks seem to be growing by the day that we’ll get one, and day by day Gordon looks ever more worried.
