The great interest rate rip off part 1

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Interest rates: Increase puts squeeze on homeowners | Special_reports | Guardian Unlimited Money

 

The Tories and Liberal Democrats blamed Gordon Brown and said the new chancellor, Alistair Darling, faced tough times.

Philip Hammond, Conservative shadow chief secretary, said: "Many families are struggling to cope with rising mortgage payments, higher taxes and falling real incomes. The result is that saving is the lowest for almost 50 years and personal indebtedness is soaring. This is Gordon Brown's true economic legacy."

Vince Cable, Liberal Democrat Treasury spokesman, said: "We are already seeing rising repossessions and insolvencies. This will only get worse as previous rate rises start to bite.

"We face the possibility of falling house prices and negative equity last seen in the late 1980s."

Consumers, whose incomes have stagnated and who have run down savings to a near 50-year low, were facing further pain yesterday as world oil prices jumped to a 10-month high of $74 a barrel, which is likely to push up petrol prices.

With personal debt at record levels after years of cheap money, Citizens Advice said there had been a sharp increase in numbers of people going into its bureaux struggling with mortgage arrears.

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BBC NEWS | Business | Industry grows unexpectedly fast

 

Industrial production and manufacturing output both grew faster than analysts expected in May, official figures show. The Office for National Statistics (ONS) said industrial output rose 0.6% in May from April, which is its fastest growth since November 2006.

Manufacturing output was also up, growing 0.4% on the month.

The ONS said the recovery was helped by the completion of major shipbuilding work and rising output from the Buzzard oil field in the North Sea.

'Market hawks'

It is the first time that manufacturing output has grown for three consecutive months since March to May 2004.

"The general picture is that the economy is growing strongly," said Michael Saunders of Citigroup.

Analysts said the figures might help bolster arguments for an interest rate rise in coming months.

 

Yep justifies another hike in interest rates....

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BBC NEWS | Business | Nigeria fears push oil over $76

 

Oil prices have surged past $76 a barrel amid growing concern that unrest in Nigeria will hit exports. The kidnap of a three-year-old British girl this week has been seen as an escalation of the violence that has plagued the oil-rich Delta region.

Brent crude climbed as high as $76.01 a barrel, before falling back to trade at $75.62. In New York, US light crude added 62 cents to $72.81.

High oil prices may fuel inflation and dent consumer spending, analysts said.

Last August, Brent crude reached a record high of $78.30 when the conflict between Israel and Lebanon was at its height.

Following the resolution of the conflict, the oil price gradually declined as a warmer than usual winter eased demand for heating oil.

By January, the cost of a barrel of oil had fallen to less than $55.

 

Quick Merv you'd better put up interest rates to combat this, as higher interest rates will resolve the problem in Nigeria. Once more the consumer will pay for higher oil prices with higher interest rates.

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Standard Life in property price warning as it cuts funds’ values - Times Online

 

Standard Life has slashed the value of its £4.5 billion property funds, becoming the first investment house to give a serious warning about price falls in the £700 billion UK commercial property sector.

Thousands of Standard Life investors will see the value of their investment cut by 6.7 per cent if they attempt to pull their money out of the funds. Financial advisers fear that investors in other property funds could be scared into selling their holdings, sending commercial property prices into a downward spiral. Mark Dampier, head of research at Hargreaves Lansdowne, the financial adviser, said: “I can see a lot of unhappy investors.”

A spokesman for Standard Life said: “We still think there’s legs in the commercial property market, high single-digit returns, but we don’t think we’ll see the same sort of returns as we’ve had for the last couple of years.”

Commercial property returns were about 18 per cent in 2005 and last year but are forecast to fall to about 8 per cent this year.

The insurer’s move comes five months after the Financial Services Authority gave warning of a danger that too many small savers were overexposed to the property sector. Investment Management Association figures show that retail investors shovelled a record £1.1 billion into open-ended property funds in the last quarter of 2006. A third of all new investment in the second half of last year went into property funds, investing in both bricks and mortar and property company stocks.

Standard Life has cut the value of withdrawals from five of its bricks and mortar funds, which have a combined value of £4.5 billion, after a rush of investors pulling out of the funds.

The insurer said that it needed to drop payouts to cover the costs of selling properties. The funds returned between 42 per cent and 52 per cent over the past three years.

Mr Dampier said that Standard Life’s move could precipitate a flight from property funds. “It’s not that the property market’s going to crash tomorrow but if you say that a trust might be revalued, it’s a self-fulfilling prophesy because people start pulling out of the sector,” he said.

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Rates forecast to hit 6% as Bank raises again - Times Online

 

Homeowners, businesses and other borrowers were today facing the highest interest rates since the beginning of February 2001 after the Bank of England ordered the fifth increase in borrowing costs in a year.

The noon decision to lift base rates to a six-year high of 5.75 per cent was widely expected by the City.

But it still marks a victory for hawks on the Bank’s rate-setting Monetary Policy Committee (MPC), whose demands for an increase were defeated last month in a tight 5-4 vote despite Mervyn King, the Governor of the Bank, casting his own vote for a rise.

The new rate rise will mean an extra £16 a month for homebuyers with a typical variable-rate £100,000 mortgage.

 

City economists sounded immediate warnings that borrowing costs remain likely to rise further.

Gavin Redknap, of Standard Chartered, said: “It is a pretty clear indication that they are minded to raise rates further. The Bank's signals point perfectly clearly to the risk of higher rates still."

Roger Bootle, economic adviser to Deloitte, the accounting group, predicted that interest rates could climb beyond 6 per cent.

“It might not be too long before the Monetary Policy Committee follows up today's interest rate rise to 5.75 per cent with another increase. And even interest rates of 6 per cent might not be enough to secure the continuation of the UK's low inflation environment.

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Precision help is needed to close our economic gulf - Times Online

 

The plight of the tens of thousands in Yorkshire and Humberside whose communities have been devastated by flooding has again turned national attention to the issues of Britain’s North-South divide.

Anger and resentment in the afflicted areas over London’s response to the torrents laying waste to large tracts of the North highlight once more how economic tides seem to have run inexorably in favour of the South.

That an economic gulf cleaves Britain in two, and that it threatens to yawn ever wider in coming years, is all too clear. The scale of the regional disparities that define this abyss are mapped out in stark terms in a recent report by the Organisation for Economic Cooperation and Development.

The OECD’s analysis, which crunches data from its member states across the developed world, shows that for all Britain’s economic success in the past decade, large parts of the country have failed to share in its rising prosperity.

 

Britain emerges as having a much wider range of recent economic performance between regions than almost all its main competitors, while the divergence in regional living standards is wider than in any OECD member bar Turkey.

Between 1998 and 2003, economic growth around the UK spanned a huge range, between minus 1.2 per cent and 9.6 per cent , widening the gap between the country’s poorest and most prosperous areas. Gauged by GDP per head, the nation’s richest area, the western part of inner London, was five times better off than the national average. Yet, at the same time, GDP per head in the poorest area, Anglesey, was barely more than half the national average.

 

The north shouldn't have the same interest rates as the South, the country is split in 2 but yet the north suffers for the prosperity of the South.

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Premier slips as wheat shortage threatens rise in price of loaf - Times Online

 

Britons have been consoling themselves with cakes and hot soup during May and June’s miserable weather, Premier Foods, the UK’s largest food supplier, said yesterday as it gave warning that bread prices would have to rise for a second time this year.

The price of a basic loaf hit £1 in February and an Australian drought, poor 2006 harvests, increased demand from India and China as well as America’s drive for biofuels have increased the price of wheat globally.

Sources said that Premier, which owns the Hovis brand, was likely to seek a price rise of about 7p a loaf, similar to the 6p to 10p rise being sought by its rival Warburtons.

Food companies’ margins are being squeezed by a 53 per cent rise in the price of wheat to £130 a tonne since March last year, while the price of edible oils and other grains have also risen.

 

Premier’s shares fell 4.7 per cent to 279¾p as the company said that the increase in wheat prices would affect profit margins and rising interest rates would increase the cost of servicing its £1.8 billion debt. However, it was confident of meeting full-year profits expectations. Overall revenues for the first half will be higher, although like-for-like sales are set to fall after Premier quit a number of low-margin, own-label contracts.

 

Merv had better put up the interest rate to tackle this problem, it's the only way to bring the price of bread down!!!!

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BBC NEWS | Business | Sub-prime mortgages 'set to grow'

 

Sub-prime mortgages are set to grow faster than mainstream mortgages, independent market analyst Datamonitor has said. The group said that by 2011, the marketplace would reach £31.5bn, compared with £24.6bn in 2006.

Sub-prime mortgages are those sold to people with poor credit histories and thus a greater chance of defaulting.

Datamonitor said increasing numbers of people would have poor credit histories in future, fuelling sub-prime lending.

Overall, the group predicted that growth in the sub-prime market would be nearly double that in mainstream mortgages over the next four years.

However, the sub-prime market will still account for less than 10% of the total mortgage market by 2011.

Dangers

Further growth in sub-prime lending may have dangers for the housing market and the wider UK economy.

Sub-prime borrowers are more likely to default on their loans. This, in turn, could cause financial difficulties for lenders.

That is exactly what is happening at present in the US, where problems in the sub-prime lending market have led to a slowdown in the wider housing market.

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Train fares to soar after ‘stealth deal’ - Times Online

 

Rail passengers face fare rises of at least 30 per cent above inflation under a series of deals between the Government and train companies.

Ministers were accused yesterday of orchestrating the increases but leaving the operators to take the blame.

Three companies signing contracts in the past fortnight have announced almost identical fare increases. Stagecoach and Arriva are planning fare rises in the East Midlands and Cross Country franchises of 3.4 per cent a year in real terms. Go-Ahead intends to raise fares by 3 per cent a year on the London to Northampton route By the end of the eight-year franchises, fares will have risen by 30 per cent. However, the companies can impose the full increase much sooner if they choose.

A standard open return from London to Nottingham costs £109 now and is expected to rise to at least £164 by 2015, given the Treasury’s modest inflation target of 2 per cent per year over the period.

 

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Unregulated fares have risen by 18 per cent above inflation since privatisation a decade ago. On long-distance services, they have risen by 31 per cent. The total amount paid in fares by rail passengers has doubled since privatisation to more than £5 billion a year. But the total subsidy has risen even faster, reaching £6.3 billion last year, four times what British Rail received in a typical year.

Merv can sort this out with interest rate rises, we have no need to worry these inflation busting increases can be tackled with the wisdom of the MCP......

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Home buyers crisis as mortgages approach crash rates | the Daily Mail

 

First-home buyers have never been at greater risk, analysts warn.

Young workers desperate to get on the housing ladder are facing a terrifying combination of factors. They include:

• The most unaffordable property prices since before the last market crash 16 years ago;

• First-time buyers borrowing a record average of 3.37 times their gross salary amid growing evidence of reckless lending by the banks and building societies;

• More buyers than ever hit with punishing stamp duty bills;

• Two recent rises in interest rates with more expected;

• Those on fixed-rate mortgages facing a huge increase in payments when their deal comes to an end.

 

Michael Coogan, director general of the Council of Mortgage Lenders (CML), warned: 'For anyone wanting to get a foot on the property ladder or move house, each month affordability is becoming worse.

'The risk of a payment shock is real. Financial difficulties are set to rise so it is essential borrowers speak to their lender if they are having repayment difficulties to avoid becoming another arrears statistic.'

Industry figures show the average loan taken out by young buyers has hit a record £117,000 - up by almost £10,000 in a year - compared with their average salary of £35,000. Banks and building societies have torn up prudent lending rules to allow some buyers to borrow five or six times their salary. As a result, there are fears that many will be unable to survive the 'payment shock' caused by recent increases in interest rates.

The problem is being fuelled by a sharp rise in the number of borrowers allowed to 'self- certify' their income. Mortgage brokers and lenders stand accused of turning a blind eye when customers have lied about their salary to get a bigger loan, in the confidence that the value of their property would rise.

 

We have no need to worry another interest rate rise will sort this out, the MCP has my full confidence as they are just concerned with the money supply as that's the be all and end all. Planet reality has no barring on any decisions. Banks are lending money irresponsible as they don't get penalised just the consumer.

 

Interest rates are just another tax on the low paid.

 

How comes we never get any proper statements from the BoE just where spending too much money. How about a proper gauge where the banks states that we should be only spending 80% of wages a month. O that's right planet reality may come into play where for most people only spending 80% of wages could be impossible!!!!

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BBC NEWS | Business | Dollar keeps falling against euro

 

The euro has risen to new highs against the dollar, near the $1.38 mark, amid lingering worries about the US economy. With investors fearful that the ongoing downturn in the US housing market will restrict economic growth, the euro rose as high as $1.3784 early on Wednesday.

The dollar's latest fall came after the Standard & Poor's credit rating agency said it may downgrade $12.1bn of bonds backed by US sub-prime home loans.

Meanwhile, the pound hit $2.0279 as it extended its gains against the dollar.

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Dollar dive continues lifting pound above $2.03 - Times Online

 

Sterling broke through the symbolic two US dollar barrier in April, climbing past the 2.012 dollar level seen just after Black Wednesday in September 1992, when the pound dropped out of the European Exchange Rate Mechanism.

In London the FTSE-100 fell following the 150 point dive in the Dow Jones overnight and a 148 point fall in the Nikkei in Japan.

Ben Bernanke, the chairman of the Federal Reserve, did nothing to calm investor nervousness about interest rates by declining to comment on his view of the American economy in a speech last night.

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Ratings agencies are accused over sub-prime risks - Times Online

 

The attorney-general for the state of Ohio has accused the financial ratings agencies of fuelling America’s mortgage crisis by turning a blind eye to the risks attached to bonds backed by “sub-prime” home loans.

Marc Dann is targeting the agencies as part of an investigation into aggressive lending practices after mortgage banks foreclosed on more than 180,000 home loans in Ohio in the past 2½ years.

Wall Street firms took on many of the riskiest home loans from the mortgage banks and packaged them into bonds. These were given a risk rating by agencies such as Fitch, Standard & Poor’s and Moody’s and sold to pension funds and other institutions.

Mr Dann, who is preparing a case against the agencies but has yet to file formal charges, said: “The ratings agencies helped to keep the market on fire by ensuring that these bond offerings got high enough ratings for them to sell, providing new funds for the mortgage originators to make new loans to increasingly unsuitable borrowers.

The banks take the money and run while the consumer is punished with higher interest rates!!!! The system is corrupt.

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Britain's households could have to find an extra £1.3bn because of controversial claims for cash by gas companies that will increase domestic energy bills.

A major row is brewing between the country's energy firms, consumer groups and regulator Ofgem that could lead to the first major review in a decade of the energy industry by the competition authorities. At issue is a £12bn demand from National Grid, which runs half the country's gas-main networks, and the three other companies that operate the rest, to maintain, upgrade or replace the nation's gas supply over the next five years.

UK households will be expected to fork out £1.3bn of that. Britain's homes already pay an average of a fifth of their gas bill, or about £100 a year, for the upkeep of the mains.

 

Another energy led pressure on inflation but Merv will resolve this with yet another interest rate rise!!!!

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The fifth bank rate rise in less than a year has left some homeowners approaching the end of two-year fixed-rate mortgage deals staring at a 70% increase in monthly payments.

Around a million homeowners have fixed-rate deals drawing to an end this year which were set two years ago at rates of around 4.5%, according to the Council of Mortgage Lenders. And with lenders due to follow the 0.25% hike in the bank rate by raising their standard variable rates to around 7.75%, borrowers who took out interest-only fixed rates and fail to remortgage in time will see monthly payments rocket by 70%.

Even a borrower with a relatively small £100,000 interest-only mortgage would see their monthly bill rise by amost £300 if they moved from a 4.5% fixed rate to a 7.75% SVR, as payments rise from £375 to £645 per month.

 

Recession anyone??????

 

Interest rates DO NOT WORK, the great economic plan is to crash the economy by stopping everyone from spending money!!!! It's only a matter of time before we are in one of the biggest recessions this country has every seen and it's been driven by poor economic management by the MPC and the Govt.

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£7,000 car that cost £21,500 | This is Money

 

When Sharlene Britton became the proud owner of a second-hand car little did she realise the cost had more than tripled from £7,000 to £21,500 minutes before she drove it away.

Sharlene had signed a credit agreement that included a loan with a massive 42.5% interest rate and payment protection insurance that cost more than the vehicle itself. The pitfalls buried in the complicated deal – one of the worst This is Money has come across – were exposed when the car was written off leaving her thousands of pounds in debt.

Following This is Money's intervention, Sharlene is no longer being pursued for the money, but her story is a stark warning to anyone considering buying a car using a similar type of loan.

 

With a interest rate of 42.5% is it any wonder people default on these types of loans. Would the default rate be so high if they where charged 6%???? Another rip off for those who can ill afford the money.

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Rate hikes 'putting brakes on property' | This is Money

 

House price inflation more than halved in June as higher interest rates weakened homebuyer demand, an influential property report revealed today.

The Royal Institution of Chartered Surveyors (Rics) said that new buyer enquiries fell at the fastest pace since February 2006, bringing the clearest indication yet that the property market had come off the boil. In the report, closely watched by economists and the property industry, Rics said that just 10.6% more of its members reported a rise in values than fall - more than half the 22.5% recorded in May.

House prices continued to rise in June - the 20th consecutive month of increasing values - but the rate of inflation was below the long term average.

Rics said interest rate hikes have begun to weigh heavily on those looking to purchase, especially first-time buyers. Demand weakened in most UK regions, with Wales, the West Midlands and Scotland being the only exceptions.

 

Off the boil or starting to crash!!!!! Are we seeing the first signs of recession???

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Threat to buyouts as banks stop the flow of covenant-lite credit - Times Online

 

The availability of “covenant-lite” loans has all but evaporated in Europe as banks turn off the credit tap.

The disappearance of easy credit is believed to have affected the ability of the banks financing the buyout of Alliance Boots by Kohlberg Kravis Roberts (KKR) and Stefano Pessina to sell on the debt.

Over past two weeks covenant-lite loans, beloved by private equity firms for their relaxed borrowing terms, have become almost impossible to acquire for all but AAA-rated borrowers, according to market insiders.

A source at one of the leading covenant-lite suppliers said: “All the big banks were doing cov-lite, but you bascially can’t do one right now.”

 

Sources close to the Alliance Boots deal admitted that the banks lending £9 billion to KKR and Mr Pessina had found it more difficult to obtain their desired syndication terms. Banks involved in financing the deal include Barclays Capital, UniCredit, JPMorgan, Deutsche Bank, Royal Bank of Scotland, Merrill Lynch and Bank of America.

This month Standard & Poor’s cut its long-term corporate credit rating on Alliance Boots from BBB to BB, which the ratings agency said reflected a “dramatic change in the group’s financial structure”. The about-turn came after a series of warnings from leading financiers about a dangerous relaxation of lending standards in Britain.

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Here's a look at ING's record of interest rate changes and the effect on it's savers. Some of the excuses from their spokesman for not passing rises to theit customers are ****ING pathetic.

 

****-watch part one: ING Direct savings rates - This is Money Blog

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Dollar falls again amid growing US fears | | Guardian Unlimited Business

 

The dollar remained under strong pressure on the foreign exchange markets last night as fresh concerns were raised about the vulnerability of Wall Street to the crumbling American housing market.With the pound trading at its highest level against the dollar since 1981, the credit rating agency Moody's said it had placed a new $6bn (£3bn) tranche of securities backed by US mortgages under review for a possible downgrade. The move followed separate announcements by Moody's and a rival ratings agency, Standard & Poor's, on Tuesday, that put $17bn of sub-prime mortgage-backed securities on credit watch, adding to growing concerns about the health of the world's biggest economy.

Sterling hit a 26-year high of $2.0363 against the US currency at one point in London trading yesterday before dropping back to $2.0322. Nick Parsons, head of markets strategy at nabCapital, said the dollar, which hit a record low of $1.3787 against the euro, was likely to fall further. "The economic brakes in the US have been slammed on in a massive, massive way," Mr Parsons said, adding that he expected US retail sales figures tomorrow to be weak. The impact on consumer spending from falling house prices was being compounded by credit becoming scarcer and more expensive, he said.

This week's turmoil on Wall Street and the signs that the housing market remains in decline will increase pressure on Ben Bernanke, chairman of the US Federal Reserve, to signal a willingness to cut interest rates later this year. Wall Street's financial institutions and pension funds are thought to be heavily exposed to possible losses in collateralised debt obligations (CDOs) - packages of debt including mortgages owed by American households that are bought and sold in the financial markets.

 

I wonder how many of our pensions will be affected if a global recession occurs which central bankers around the world seem to be wanting to create. Interest rates DO NOT WORK in controlling the world economy there are just too many variables.

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Mortgage meltdown: Are we about to follow the US into a house price crash? | the Daily Mail

 

No one could accuse Gordon Brown of inactivity on the housing front.

As Chancellor, he commissioned and published a series of heavyweight reports from distinguished economists designed to modernise the market for home loans and shake-up Britain's planning laws.

Unfortunately, most of these documents have been allowed to moulder away in Whitehall while the country has, year after year, failed to meet targets for new, affordable homes.

Now that there is a full blown housing crisis, with a shortage of properties driving up prices ever higher and placing enormous pressure on family budgets, the new Prime Minister has been forced to recognise desperate difficulties in the market-place.

The problem is that Brown's solutions, such as creating a new market in fixed-rate, long-term mortgages and easing the financial constraints on local authorities, could take years, if not decades, to make a difference.

In the meantime, surging mortgage charges (which are likely to rise again) are causing enormous stress on consumers, especially those tempted by lenders into over-borrowing.

The result could be that Britain - like the U.S. - will soon face a housing catastrophe.

The causes of this mess are manifold.

First, by concentrating on controlling inflation, rather than asset prices such as property, the Bank of England has allowed a bubble to develop in mortgages, credit and house prices.

 

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Another difficulty is the fact that huge regional disparities in house prices have built up - with prices in London and the South-East soaring faster than in other parts of the country, partly a result of the huge rewards in private equity and City trading.

 

With 4,200 new bonus millionaires created in the financial community last year alone, the price of housing in many parts of London, is now way beyond the means of ordinary earners - let alone people working in health and education services.

Among the key reasons for Britain's booming house market has been the low supply relative to demand.

It is estimated that 223,000 new houses are needed each year to keep up with demand, but even in the best years, only 160,000 are being produced.

 

The BoE is incompetent and they are allowing this country to head towards a precipice which may take at best several years to recover or at worst decades, tens if not hundreds of thousands hard working Britain's are at risk of losing there homes and facing financial disaster. Financial mismanagement is rife throughout govt and the banking sector yet it's the consumer who foots the bill via interest rates and higher taxes, we get to pay for their mistakes.

 

Due to huge regional variations it's economic suicide to manage the economy centrally as the BoE does. The north is paying for the excess's of London rich, but even the majority of Londoners are now becoming excluded due to some extreme wage inequality.

 

Fortunately another raise in interest rates will solve this problem!!!

 

If the US economy crashes and burns it's a odds on certainty we'll follow.

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BBC NEWS | Business | More 25-year fixed-rate mortgages?

 

With housing now top of the political agenda, Prime Minister Gordon Brown has put forward a plan to provide more long-term, fixed-rate mortgages as a key measure to control house prices. But will it work? In fact it was in 2003 that, as Chancellor, Mr Brown asked Professor David Miles to report on why such mortgages are not very common, or indeed very popular.

Back then, Mr Brown said that if there were more of these mortgage deals around, they would help to smooth out the ups and downs of a volatile property market.

 

 

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Will it work?

It has never been obvious why, exactly, more long-term fixed-rate mortgages should in fact lead to more stable house prices.

And the immediate reaction from industry experts to the government's latest announcement shows a degree of scepticism.

"The overall benefit to consumers from the government legislating for longer-term fixed-rate mortgages is uncertain," said David Stubbs of the Royal Institution of Chartered Surveyors.

As Professor Miles reported four years ago, these deals are not very popular because they tend to have a higher interest rate than their short-term counterparts.

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Is the puny dollar a sign of America’s decline? -Times Online

 

There are many explanations for the apparently perverse relationship between currencies and economic performance, though none of them is watertight. For example, currencies tend to strengthen in response to rising interest rates and fears of inflation – which are obviously bad for economic performance – but also in response to strong economic growth.

On the other hand, a currency may weaken because inflation prospects are improving, as they are in the US at present, or because investors fear a financial collapse, which some believe to be a looming in the US mortgage market. But if the causes of currency strength are ambiguous and contradictory, the consequences are clear. A currency that keeps rising, as the euro and sterling are at present, will eventually do serious damage to almost any economy, hurting export competitiveness and stunting growth.

This is what happened to Britain and America after the pound and the dollar appreciated excessively in the early 1980s and again in the early 1990s. It happened to Germany and Japan in the mid1990s and again in the middle of this decade to the eurozone. Europe and Britain enjoyed some relief in 2005, when the euro and the pound temporarily weakened.

But now they will have to bear the full brunt of excessive currency strength. In Britain’s case, the strength of the pound may not do too much harm, since it will forestall or at least delay any further rate rises from the Bank of England. On the Continent, however, the European Central Bank seems determined to keep raising interest rates, thereby exacerbating the damage done by the euro’s excessive strength.

Americans, meanwhile, will enjoy the benefits of a super-cheap currency, which will more than offset falling property prices and problems with a small minority of mortgage loans. American politicians, for all their faults, instinctively understand this, which is why they have generally welcomed a falling dollar and have been pressuring China and Japan to let the dollar weaken against the yen and the renmimbi – not just, as at present, against the euro and the pound.

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After the credit binge, markets fear the crunch is on the way - Times Online

 

The dollar plumbed fresh lows and shares in Europe tumbled yesterday as investors fretted that strife in America’s sub-prime mortgage market could herald a wider credit crunch, which, in turn, would undercut US prospects.

In another turbulent day for global markets, rattled by Tuesday’s threat from Standard & Poor’s (S&P) to downgrade $12 billion of bonds backed by US sub-prime home loans, the dollar bore the brunt of investors’ anxiety.

The greenback slipped to a record low against the euro for the second day running, lifting the surging single currency to a high of $1.3787. The pound was propelled to a new, 26-year high, closing in London at $2.0343, having earlier hit a peak of $2.0351.

In Europe, shares were badly battered, with the FTSE 100 index and France’s benchmark CAC40 both shedding 0.3 per cent, while Germany’s DAX lost 0.8 per cent.

 

 

 

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Anxiety over the risk of a credit crunch comes after years of lax lending by US instititions, encouraged by abundant, cheap credit created worldwide by past, very low interest rates. Now, with global interest rates sharply higher, this glut of easy money is drying up. The fear is that, as rates charged to borrowers rise, more of the loans too readily handed out in the past will turn bad, leading banks to impose much tougher conditions on new lending, slamming the brakes on corporate activity and the US economy.

The second worry, over the housing downturn, is closely tied to the first: were US house prices to fall more sharply, this could fuel still more mortgage defaults, triggering even greater tightening of credit conditions.

Fear of such a vicious circle was ratcheted up by the S&P warning over the value of bonds backed by high-risk, low-quality, sub-prime loans.

Yet economists remain confident that such worst-case scenarios will not materialise. Despite a warning yesterday from the National Association of Realtors that US home sales and prices will fall further this year than it previously thought, Charles Plosser, a senior Federal Reserve official, argued last night that this should not derail prospects for US growth to rebound...

 

 

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What has been the impact outside the mortgage industry?

Hedge fund are losing a fortune because they have bought hundreds of billions of dollars of bonds backed by sub-prime mortgages, which are plummeting in value. Since hedge funds get most of their money from pension funds, retirement pots are also taking a drubbing. The cost of borrowing is rising as investors get increasingly nervous about lending

Have any UK firms taken a hit?

In addition to HSBC’s mortgage losses, Queen’s Walk Investment, the listed vehicle of the Cheyne Capital hedge fund, reported a plunge into the red for the year to March 31. Cambridge Place, the London fund manager, was forced to close its $908 million listed fund a day later. Barclays is likely to make a significant loss on the $300 million loan it made to one of Bear Stearns’s hedge funds

 

Don't worry dangerous Merv will fix it with a interest rate rise.....

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Lenders set to foreclose on 1.8m borrowers in sub-prime crisis - Times Online

 

Mortgage banks are expected to foreclose on 1.8 million American home loans this year as already-stretched “sub-prime” borrowers contend with rising interest rates, according to new research.

The predicted foreclosures represent a 44 per cent jump on last year and are expected to leave about 720,000 mortgage holders without a house, with potentially far-reaching consequences for the global economy.

A foreclosure is a legal process typically set in motion when a borrower falls 90 days behind on mortgage repayments. About 40 per cent end in a forced sale or repossession of the house, while the bank and borrower reach an alternative repayment schedule in the remaining cases.

The number of foreclosures jumped by 87 per cent to 164,644 in June, compared with the year-earlier period, according to new figures released by RealtyTrac, the American mortgage research firm.

This brings the total number of foreclosures to 925,987 for the first half of the year. It compares with 1.25 million for the whole of 2006 and is more than the 847,000 recorded in 2005, according to RealtyTrac.

A significant jump in the number of foreclosures is bad for the housing market because it leads to fire-sales and damages confidence, which then reduces prices. Declining house prices discourage consumer spending and make lenders generally nervous about approving loans, which is bad for the economy as a whole. As the world’s economy becomes increasingly integrated, an increase in the cost of borrowing and a decline in company profits are more likely to cross the Atlantic and have an impact around the globe.