Over the past one year, credit markets worldwide have been seethed by the subprime contagion in the US. Banks have created increasingly complex securities that are difficult to comprehend. They have sold, bought and resold mortgage-backed securities, and been involved in Collateralized Debt Obligations (CDOs) that did not hedge risk in the way they were promoted. Insurance companies, pension funds and fixed income investors, having been caught with risky securities, are reluctant to lend to banks. This has made extension of new mortgages and CDOs to worthy homebuyers and businesses very difficult.
Until recently, many thought that the crisis is mostly confined to the US financial markets. However, this assumption has been proved wrong as the crisis has visibly spread to the economies of both developed and emerging markets. And, in the process, no economy seems to be as susceptible to an unrelenting credit squeeze as the UK. The country's housing market is already reeling under the worst-ever decline since the previous recession and the financial sector has been confronted with huge writedowns.
Three-month euro Libor increased to another high for the year and Libor/OIS (Overnight Index Swap) spreads widened again. Latest developments at UK and German banks served as an indicator of the vulnerability and troubles emanating from the credit crisis currently besieging financial institutions globally. Deutsche Bank AG, Germany's largest bank, reported its first quarterly loss in five years after writing down the value of loans for leveraged buyouts and asset-backed securities of worth €2.7 bn amid the global financial crisis. |
