The consequences of the financial crisis on the credit market

The financial crisis erupted in Europe in the course of 2010. It took on worrying proportions in 2011 and is now threatening to implode the European economic area. The origin of the financial crisis has its roots in the worrying development of public deficits and especially in the will of European governments to stem this alarming development.

 

The first observations

Fourteen EU member states posted public debt above 60% of GDP in 2010. These are Greece (124.9%), Italy (118.2%), Belgium (99%), Portugal (85.8%), France (83.6%), the United Kingdom (79%), Hungary (78.9%), Germany (78.8%), Ireland (77.3%), Malta (71.5%), Austria (70.2%), the Netherlands (66.3%), Spain (64.9%) and Cyprus ( 62, 3%).

This observation has led to a first consequence: international rating agencies are starting to take an interest in the ability of member states to honor their sovereign obligations. Thus, France and Belgium have recently lost their famous triple A and the long-term prospects are mostly negative for many member countries. This means that interest rates for member states could rise and increase the burden on states to finance themselves on the market and make it more difficult to finance the deficit between national revenue and expenditure.

 

Whose responsibility is it?

The banks’ responsibility in this development is important. In fact, many renowned banking establishments have purchased sovereign debt from highly indebted states. These institutions have speculated on the high interest rates offered by these countries while minimizing the risk of bankruptcy. However, it turns out that some countries may not be able to meet their obligations (like Greece) and cause their creditors, that is to say the lending banks, to fall.

The reaction of the governments of the member states has been of three kinds: refinancing of banks on the verge of bankruptcy. This refinancing was coupled with an almost majority stake of the States in the supervised banks (nationalization) and of course, therefore, increased control by the States of banking activities. These necessary interventions unfortunately have harmful effects on the real economy and in particular a redefinition of credit policies.

 

The impact on credit

From the first quarter of 2012, the negative effects on economic activity are obvious: a reduction in mortgage loans in France by 47%, a decrease in European car sales by almost 27% and in Belgium an increase in the number of bankruptcies of 26% . In this area, it turns out that some companies that go bankrupt yet have well filled order books but no longer know how to access the credit market because banks are now practicing strict and prudent policies.

In this situation, independent credit brokers, such as Lite Lending, may well have a fundamental role to play in the continuity of the real economy. Indeed, Lite Lending works with banks specializing in credit. Some of these banks do not offer traditional services (bank branch, savings account, current account). They are specialized only in the granting of credit and not receiving savings, they do not speculate either. In other words, the financial crisis has hardly changed their approach to credit.

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