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As uncertain as the global financial market currently is, one thing that has remained certain is the fact that consumers continue to put up with increases in the costs or prices of essential needs and services. Events in the US in the last one week have made it clear that the credit crunch is taking an unprecedented dimension, further crippling the world’s biggest economy. The implication here is that other economies, including Britain’s, are not immune against the impacts of the crisis.
Following the backlash from sub-prime mortgage defaults in America earlier in the year, Britain’s financial market equally reacted and mortgage loans became the first to suffer. Homeowners found it increasingly difficult to keep up mortgage repayments and those on fixed-rate deals were left with little or no hope of refinancing their mortgages as their deals came to an end. Those hoping to get on the property ladder had their hopes dashed and, in spite of the UK Government’s effort to revive the market by pumping liquidity worth £50 billion, the situation is still very depressing.
This week again saw the US economy drifting further into crisis as Wall Street faced imminent collapse until the President Bush-led administration secured a bailout deal worth over £380 billion ($700 billion). Unanimously, it has since been described as the biggest bailout since the Great Depression.
Borrowing the US bailout style
Since talks of the planned bailout began analysts have also pondered the situation in the UK, suggesting a need for a similar approach to the crisis in the country’s financial market. In the vanguard of propagating this were experts from Deutsche Bank AG who estimated that a recue plan of this magnitude would cost the country up to £20 billion. But they were unequivocal in recommending it as a way forward in respect of this logjam.
£20 billion, they advanced their argument, represents approximately 75 per cent of the £26 billion of the outstanding non-prime residential mortgage-backed securities in the country. As such they wrote in a report: “We would argue that the likes of the UK and Spain (possibly Australia) would benefit from such a programme.” Yet this plan would only achieve the desired result if all UK securities backed by home loans were included, added the analysts.
Tackling this problem warrants urgent action as, in the mean time, borrowers are having every heat turned on them. A recent survey found that a funding shortfall of £38 billion faced by banks could almost certainly collapse Britain’s economy. But in a bid to raise enough funds to swell their cashbooks British banks, warned JP Morgan, would raise charges for customers. Obvious, loans are a clear target, amongst others.
Growing financial instability would continue to force borrowers to default in repayment and lending would decline as banks and building societies try to steer clear of the murky water of bad debt. But JP Morgan warned further that significant increases in the cost of loans for British borrowers were almost inevitable as economic downturn continues.
Be cautious
Perhaps borrowers could do themselves a big favour by not trying to bite more than they can conveniently chew. While banks are often accused of lending too much money to people, borrowers also need to be cautious and resist the temptation of asking for or even accepting unsolicited loans when they are not sure of how to repay. One very good way to manage one’s finance at a time like this is to also consider how much is earned each month and how much goes out in the form of expenses. This will determine how much you can borrow and pay back with ease at a particular time. Comparing interest rates would also surely help, as people would be able to shop around for the best deals that suit their specific needs.
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