1. Timeline-Global Credit Crunch
A year ago, few people had heard of the term credit crunch, but the phrase has now entered dictionaries.Defined as "a severe shortage of money or credit", the start of the phenomenon has been pinpointed as 9August 2007 when bad news from French bank BNP Paribas triggered sharp rise in the cost of credit, andmade the financial world realize how serious the situation was.The roots of the credit crunch, however, started earlier.
1.1 Sub-Prime Problems
Between 2004 and 2006 US interest rates rose from 1% to 5.35%, triggering a slowdown in the US housingmarket.Homeowners, many of whom could only barely afford their mortgage payments when interest rates werelow, began to default on their mortgages.Default rates on sub-prime loans - high risk loans to clients with poor or no credit histories - rose to recordlevels.The impact of these defaults were felt across the financial system as many of the mortgages had been bundled up and sold on to banks and investors.
1.2 A Quick Guide to the Origins of the Global Financial Crisis
Most analysts link the current credit crisis to the sub-prime mortgage business, in which US banks givehigh-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.