blog2- the spread of the credit crises

Blog 2 – How has the crisis spread? – you will need to cover what has happened between September and today and explain how and why other sectors of business and the economy started to become affected.

Many other sectors are affected from the credit crisis for example the stock market were the Dow dropped and in many other countries there also occurred drops on the stock market, financial institutions like banks and many others made looses of billions of dollars and many also went bankrupt or need to make merger deals, home owners the house prices are low like they had never been before and almost nobody is buying new houses and the rent prices dropped as well.
And the housing market is also still affected even it is not that bad in Europe but in the UK the house prices also decreased because also buyers are scared to invest in the housing sector.

First it was just the sub- prime mortgage sector in the US then it spread to almost every bank in the US and Europe which had invested in this sector. Some of the most important banks like UBS lost billions of dollars.
After some time the crises spread to other firms like the Financial Guaranty Insurance Company which insure bonds got in trouble because they lost there credit rating that guarantees a structured security on bonds.
Some newspapers wrote that there is another potential crisis in the huge market in securities that insure against defaults on companies credit. These are new financial instruments that are supposed to cover banks losses





Now the defaults in the US housing market are not only affecting the sub prime houses anymore they are also spreading to the top housing market and now the banks and investment funds have to face much higher losses.
US house prices have fallen but they still keep falling.
Experts say that the default rates on the outstanding loans in the US are higher then a long time before. If the default rates are going to rise this can cause financial damage.
Furthermore they say that the banks are trying to protect themselves and so the still borrow money to companies but they say the market has to shut down otherwise the credit crunch will never find an end.
Now banks have not the liquidity like they were used to and they have to realise that they can not “safe” everyone.
Banks only leading to each other at a very high rate
The credit crisis is now also spreading to student loans and car dept.
Now there are similar problems in Europe too especially in Spain, Ireland and Britain.
Many sectors are now influenced especially in the European countries like the US have too high CO2 emissions so they really need to switch to “green energy” but costs will raise and because the dollar is so weak at the moment because of the credit crunch the UK’S is not able to afford it at the moment.

In November 2007 the crisis already started to spread in other sectors of consumer credits with losses of 445 billion US dollars.
Analyst at this time had been afraid that investors are starting to worry and that the crisis will spread in other sectors and exactly that happened. At this time that the losses in sectors like credit cards, auto loans non-subprime mortgages could reach 147 billion US-dollars. All this changes would lead to a high unemployment rate and a reduction in the economic growth. At this time analysts were still pretty optimistic concerning to the total economy.
Even if the results from the crisis seem to have a bigger effect on the US the credit crunch has shown that there is little refuge from today's worldwide economy. In the finacial sector the credit crunch will lead to jub cuts in companies and cities will not get any support from the government anymore. So maybe there will be less revenue and so the community has to suffer because they earn less money and that leads to that they spend less and this is like a spiral that maybe will not end for a long time.

causes for the credit crises

The subprime crises was bank crises which started in July 2007 because the prices of house which were increasing all the time start to decrease and more and more credit users couldn’t pay back the money anymore. At the beginning there were only the subprime loans were affected which means they have a defective creditworthiness.

So on the beginning of the summer 2007 people in US were not able to pay the money back for these loans and this was the first time since several years and these caused a permanent increase of the interest rate but the prices for the houses decreased.
So the banks borrowed too much money and now they have liquidity problems. So the banks doesn’t really have earnings anymore and banks don’t want to lend money to each other anymore and this leads to a credit crunch, which means there is to less money supply which causes a recession.

To deal with loans or mortgage is really risky business and these were also the first ones who were affected when loan takers could pay back the money anymore. Banks and other financial institutions make losses in the amount of many billion US $.

Because of this investment banks also made loses and private or institutional investors got willingness to take risks. That means they took out there money from the capital market or didn’t make new investments. Because of the crises there was a high liquidity requirement and that led to an increase of the money market rate.

So the money market rate rose and the investors stop investing so banks didn’t get any money. The central banks from many nations had to offer billions of dollars to the money market so the market had certain liquidity so the central banks prevented a common credit crisis.