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‘Views from the Outlook’ by Robert May - Credit Crunch 2 (A LIBOR Story)

As I look out of the window at the start of a new year, I can’t help but reflect on where the economy is headed. Quite often, following a successful horror movie, a sequel will be released. Following the most recent 3 month LIBOR rate (the rate at which banks’ lend to each other), it seems that the economy could be heading for Credit Crunch 2, The Sequel as well.....

The LIBOR rate is a measure of the banks’ confidence in lending to each other. Back in January 2008 LIBOR was broadly in line with the Bank of England’s base rate. The rate then rose peaking in April 2008 at 0.60%, 10 points above the base rate of 0.50% and the credit crunch began.

In 2009 Quantitative Easing and other procedures to stabilise the economy were introduced, and by September 2009 the LIBOR rate was heading towards the base rate.

Now, however, the banks are running scared about the chance of a Greek or Italian default and the collapse of the euro. In November 2011 the LIBOR rate reached 1.00703%, twice the base rate of 0.50%. In January 2012 it has reached 1.08706% the highest since July 2009. This increasing gap reflects the fears of the dangerously wobbly European economy. Banks have already had to write down exposure to the Greek debt which puts pressure on less capitalised institutions. British banks have a £64 billion exposure to Italy and any default by them could signal another banking crash, more tax-payer bailouts and a second recession.

There are other reasons for pessimism as well, such as:-

  1. The savage public spending cuts that will dent demand
  2. The effects of QE are unknown (they could stoke inflation)
  3. British House Prices are still overpriced
  4. Western governments and consumers have built up colossal debts
  5. Western economies face a demographic timebomb (aging population) which could erode the wealth of nations.

Not all is doom and gloom, there are some reasons for optimism:-

  1. The weak pound means that British products are cheaper, thus helping exports
  2. Powerful stock market rally has boosted confidence
  3. The financial markets have welcomed efforts to tackle the deficit.
  4. Unemployment rises have been smaller than forecast

In the end, as with all predictions, nothing is certain, except that we are in for a stormy time ahead.

Should any of your clients suffer financial strain in the future, particularly in view of the above, we at Portland Business and Financial Solutions are always available to discuss their particular problems and assist. Hopefully, if advice is sought early enough, they can ride the storm that may be on the horizon.

Robert May
Senior Manager (Poole Office)
Profile - click here

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