Finding your way round the credit crunch.jpg

Finding your way round the credit crunch

By: RAOUL RUIZ MARTINEZ

[email protected]

Raoul Ruiz Martinez is the resident Independent Financial Adviser for Finesco Financial Services Ltd at the offices of euroFINESCOs.a. He provides financial advice to UK and European expatriates in Portugal with a high degree of client service and total confidentiality. Finesco Financial Services Ltd is authorised and regulated by the UK Financial Services Authority (FSA).

HERE ARE some interesting excerpts from a recently published article in a UK tabloid that I came across during my daily deciphering of the global credit crunch. It is listed as an ‘A to Z’ for those trying to find their way around this topical maze.  Even if you are fed (excuse the pun) up to the back teeth with this subject, you may find it amusing.

Bear Market

What happens when the Bull Run (see below) stops and you get a mauling.

Bear Stearns

American investment bank that has been the biggest casualty to date, taken over by JP Morgan with American taxpayers’ money.

Bernanke, Ben

The Chairman of the Federal Reserve of the United States, and thus the lender of last resort to America’s banks. Bernanke’s hobby is the history of the Great Depression.

Bizarre Victims of the Credit Crunch

The squeeze has reached unexpected places far from America: Northern Rock, Sachsen Bank (Germany), BNP Paribas (France), IKB (Germany). Also some in Australia.

Bull Run

When share’s prices go up.

Credit Crunch

Where we are. No one’s lending because no one can be sure they’ll get paid back and no one knows where those bad American sub-prime loans have wound up. Increasingly that means they won’t lend to you either. Bad news.

Darling, Alistair

Unlucky, some say.

Greenspan, Alan

The most important figure in the global economy in the past 20 years. Left the Federal Reserve after 18 years in January last year. He has arguably left an unfortunate legacy – the long run of easy credit. Chairman of the Federal Reserve from 1988 to 2006, otherwise the man who underwrote ‘the bubble’.

Liquidity

The ability to turn an asset or security into cash, quickly.

R-Word

Recession. Don’t mention it. Technically, two successive quarters of negative growth.

Recession

“While there is no basis for predicting a recession right now, the risks have surely gone up. The combination of softness in the housing sector, contractions in credit, increased uncertainty and volatility, and losses in wealth make the chances significantly greater now”, says former US Treasury Secretary Larry Summers, now a professor at Harvard. He should know.

Responsible lending

What’s that?

SIVs

Structured Investment Vehicles. Not the most transparent. These are specialist funds of money, kept off the parent bank or hedge fund’s published balance-sheet and thus away from the prying eyes of shareholders, analysts and journalists. It wouldn’t matter much except that many of these funds are invested in what are now illiquid assets, such as securities backed by sub-prime mortgages.  Perhaps a modern day with-profits fund?

Sub-prime

Prime borrowers are those likely to repay their debts. Sub-prime borrowers aren’t. The dark side of the property boom, the sub-prime market was fuelled by – and in turn itself helped to fuel – spiralling house prices, which meant people simply had to extend themselves more and more to buy a home; plus liberalisation, deregulation and intense competition for business on the part of banks and mortgage brokers made sub-prime borrowers attractive customers.  Loans on huge salary multiples and at cheap introductory rates were the norm. Things were fine while interest rates were low, but as they rose, those coming off cheap fixed-rate deals were in for a shock.

According to the US Department of Treasury guidelines issued in 2001, “Sub-prime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories”. Also known as second-chance lending. Not as the more accurate “no-chance” lending.

This Time It’s Different

The Bull Run can’t end. It always does.

X-rated

The language the politicians used when they discovered they’d have to pay for the banks’ follies.

I could have written another sombre article concerning the complexities of the situation and that in fact the real victims are the individuals who have been permitted to take on so much credit in the first place.  At any rate, I’m convinced that any of you concerned about your financial position would have endeavoured to read every possible write-up in print and on the internet.  So, I thought some lighter reading is well overdue.

After almost a year, the effects of the credit crunch are still felt on a daily basis, whether it is the price of a cup of coffee or your mortgage. We’ve been told by independent analysts and governmental, national and supranational organisations to tighten our belts and expect a shaky ride.  For what length of time the ride will last, financial commentators differ.

Needless to say, now is as good a time as ever to re-value your financial position with a qualified and experienced financial adviser.

Raoul Ruiz Martinez is based in the Algarve office of euroFINESCOs.a. as an Investment Adviser for Finesco Financial Services Ltd., Glasgow and regulated to advise on capital investments in both the UK and Portugal. He can be contacted either by telephone on 289 561 333.