Week 8: Credit Crunch !

Since in the 2007, there has been a serious phenomenon that people had to face which was the credit crunch problem! They thought that it was similar like the term recession (due to bad of economy) while it is not. What is meant by credit crunch actually? The credit crunch is regard as “severe shortage of money or credit” where it is the outcome of selling the debt badly. For instance, when the banks lend money to those who are need it and then they could not be able to pay back their loans, and as a result, the borrowers need to mortgage their property such as house to recover the bank’s losses however, it still cannot help much and the lenders still lost their money in the end, therefore, there was a credit crisis because of banks or lenders cannot give out the loans for they to survive! So from now, those banks and lenders are more likely to be cautious of lending money to others.

Can we determine the roots of the crisis? Well yes, because the current financial crisis has occurred from 2001 due to the Internet boom and the shock of September 11 from the terrorist attacks. Other than that, the Federal bumped money into the US economy and slashed its main interest rate where the rate is too low for too long! But, what was the cause of this continuous credit crunch? It is begins with the sub-prime borrower in United States in which this kind of people has a lower level of particular earnings that may lead to not capable to endorse their earnings which thus carry the household with a  lack of credit history. Probably, it was a wrong decision when the United States mortgage industry aiming this type of people in order to help them by promised them with the opportunities to purchase their own house with less strict of the repayment loans.

Therefore, it could tell that the mortgages have been wrongly sell to those who are not certain of what they are doing; buying. This is happened perhaps due to the shortage of an effective rules in the industry which then permit this industry to provide vast amount loans to the sub-prime with less concern of the borrower's ability to used the loans well and facing with the dropped value of the security/salvation.

As I have found the recent news in The Telegraph News (2013), in Italy, the country is nearly facing with the phase 3 of credit crunch which has happened in 2008-2009 and 2011. Many of the companies are run out of critical funding, threatening a slide into deeper depressions because of the banks are too frightened to lend money to them. As a result of this, most of the companies are lack of liquidity and predicted going to bankrupt every day due to difficult to obtain the capital of investment for their organisations. Why is this happened? It is because of some particular people are not paying the debts on time therefore, the late payments are lead to the serious problems across the board in Italy and thus, also leads to the suffocated economy in this country.

It is clear to determine the consequences of the credit crunch where it will cause the prolonged recession or slow recovery of the economy, reducing the availability of borrowing and increase the cost of bank lending and bond & equity finance, depressing the share price and houses that could adverse wealth and collateral effects on household spending and business investment, a general increase in uncertainty feeding through into reducing the business and consumer spending and confidence and lastly, could lead to bad impacts on UK exports to US, other economies may have the direct or indirect effects due to the credit crunch problem.

However, there are some ways for business to operate during the financial crisis; i.e. the Italy companies might avoid this crisis by understand and maximising the company's current cash as the cash is very valuable in a company. Other than that, they could try to identify and minimising their business's operational risk, providing or producing several scenario planning for the business to be prepared well to facing with the crisis if it is happen in some time and lastly, maintaining the confidence of the main stakeholders by open lines of communication with the major bankers and always be transparent (business's financial accounts and activities) to them in order to convince them that they are not make a wrong decision to lend the money.