Latest credit crunch woes

[Tuesday]

The news came yesterday that Victoria Mortgages, which offered loans to people with poor credit histories had gone into administration, becoming the first UK lender to fall victim of the global credit crunch.

It might not be that big a deal, but as the BBC’s business editor Robert Peston commented yesterday,

Victoria is a microcosm of the wider credit squeeze, viz the reluctance of banks to lend to other financial institutions and the evaporation of demand for certain kinds of bonds and tradeable debt.

Here’s why Victoria’s demise matters: it operates in markets that directly affect you and me, in contrast to the special investment vehicles and hedge funds which have been the main British victims of the turmoil so far.

And small businesses are now being hit by the credit crunch. This will impact on employment levels – as expansion becomes harder, firms will be less inclined to take on more staff.

A lack of liquidity means banks are being more selective over who they loaned money to, the Federation of Small Businesses (FSB) says.

Those who could get loans now faced paying interest rates in excess of 10%, it added.

The credit crunch follows a surge in UK interest rates to 5.75%.

“The issue is that the banks are being more choosy over who they lend money to until they ride out the storm,” said FSB spokesman Matthew Knowles.

“There’s a bit of a ‘Computer Says No’ mentality. Banks often see small businesses as more of a risk – and because they aren’t able to tick all the boxes which the banks set out, they struggle to borrow.”

The banks could be forced to pay out £70 billion in the next ten days

if investors, such as pension funds, decline to buy the banks’ latest debt issues which are now due for renewal.

Analysts say investors are reluctant to buy the new debt until the full impact of the US home loans crisis is known.

With fewer buyers for the debt, banks may have to refinance it themselves.

[…]

An unnamed boss of one of the UK’s largest banks told the Sunday Times at the weekend that conditions in the money markets were the worst for 20 years.

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