Happy anniversary global credit crunch.jpg

Happy anniversary global 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).

THE CERDIT crunch erupted a year ago after building up over the earlier part of 2007.

Volatility engulfed stock markets around the world during that month (August) as central banks pumped vast amounts into the financial system to stop it seizing up following the crisis.

One year on, it is clear that the subprime debacle had a major and deleterious impact on global economic growth and share prices, while also shaking up policy making. Indeed, the fallout from the crisis is still being felt in many countries, with many analysts pessimistic about global economic expansion this year and in 2009.

Inevitably, since credit is key to economic growth, the crunch has slowed expansion. Yet several experts argue it was only a matter of time before some developed world economies, especially America, paid the price for a massive debt binge over recent years driven by low interest rates.

There have been landmark collapses and policy moves since the crisis erupted. In Britain, Alistair Darling, the Chancellor of the Exchequer, pledged in September that the Bank of England would guarantee all deposits at Northern Rock to stop a run on the bank and shore up confidence in the British banking system. The bank relied on credit markets to fund its mortgage business, and hit trouble when they seized up after the subprime crisis, forcing it to go cap in hand to the Old Lady for temporary funding.

Central banks also pumped hundreds of billions of dollars into money markets to stop them freezing up completely and came up with schemes to give commercial banks access to funding as the subprime crisis grew. America’s Federal Reserve began slashing interest rates, from 5.25 per cent in August 2007 to two percent by April, including an extraordinary three-quarter point cut in January as global stock markets plunged over fears about the impact of the subprime crisis.

Inflation

The worldwide surge in inflation because of high oil and food prices has complicated the job of ameliorating the impact of the subprime crisis and credit crunch on economic growth.

The European Central Bank in July raised interest rates for the first time in more than a year. It hiked its main interest rate by a quarter point to 4.25 per cent in a bid to curb inflation running at four percent, against the central bank’s target of close to but below two per cent.

The euro has been strong as a result.

Housing markets in France, Spain, Italy, Ireland and Britain had been driving European growth along with German exports, but both these engines had stalled.  For example, in Spain you have more empty houses than in the US, for an economy which is not even one-tenth of the size. German exports are starting to collapse because of the overvalued Euro and the global slowdown.

In contrast, American exports had risen sharply thanks to the weak dollar, while sectors in America like oil, agriculture and alternative energy were booming, helping to offset the retrenchment in housing, the financial sector and carmakers. As a result, the positive analysts state that the US has done what is necessary and that they (the Americans) are at the tail-end of the crisis. The concern for these analysts, and many others, is what is going to happen in Europe?

The rise in European inflation owing to higher food and energy costs, and the risk that wage increases could follow, have taken centre stage recently as the region’s key economic concern. That, in turn, has pushed the subprime crisis, and the credit crunch it triggered, out of the spotlight.

The two big shocks hitting the European economy – as in the US – are the income shock from surging food and energy prices and the credit shock. There is a debate as to which of these is the most important.

Within Europe at least, the economies that have fared worst in the situation – the UK, Spain and Ireland – are also the ones experiencing the most significant credit shocks. The food and energy shock, by contrast, has been broadly comparable across economies.

Asia

What about Asia? Many parts of the world have felt the impact of the subprime crisis, including the Asia-Pacific but to what extent? The writing is clearly on the wall as far as the US and the Eurozone are concerned but Asia has demonstrated resilience in these times. Perhaps stronger regulatory oversight following the debilitating 1997 Asian financial crisis, lower demand for higher yielding foreign assets and the fact that credit securitisation was still something of a novelty in Asia helped to explain the lower losses.

The only way to see Asia’s ranking in this current global financial crisis is to review the situation next year. Where will it be then?  We’ll just have to wait and see but good luck to one and all who are braving the financial turmoil that continues to reverberate across our world and we look forward to calmer conditions this time next year.

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 or on email [email protected]. Some of the services provided are not regulated by the FSA because they are not included within the Financial Services and Markets Act 2000.