Worldwide
Effects of the Credit Crunch: Europe
The credit crunch has
been watched around the world, and now it is hitting home with more countries.
Europe has gone from investing in the American banking system to falling alongside
it. The European credit crunch has left people
worried over their investments, their homes, and their financial futures. A large
majority of people have been living off of credit well above their means for over
a decade, and now credit is hard to find. That lifestyle is being challenged,
much the same as it is in the U.S. The European banks
are now struggling to keep their heads above water, after years of risky lending
to people who could not afford to pay the loans back. Over previous years, subprime
loans were made in high number, bringing in big profits for the banks who collected
high interest rates and origination fees and then sold off the loans to investors.
Of course, these investments are only profit making if the borrowers follow through
and pay off the loans. In many cases, they went into default instead which essentially
left the banks with less free cash than opening the loans gave them to begin with.
The world is now connected like never before. The financial
pains in one country are going to be felt around the world, and this credit crunch
is no exception. As the Americans face a foreclosure crisis, lose massive numbers
of jobs, and fall back to living on their actual incomes due to a severe credit
crunch, the exact same situations are being seen in the credit crunch Europe.
This is because both countries were dealing with subprime
lending and Europe was buying into some of the American financial investments.
They felt secure with these investment practices, until the situation in the United
States started falling apart. Suddenly, the bundles of mortgage loans and other
bonded securities that they purchased were worth far more than the collateral
actually attached to them. That meant when the borrowers stopped paying on the
loan, the banks were left holding more debt than they could get back through the
sale of their collateral properties. Some losses such
as these can be expected in the banking business, but when you are dealing with
massive losses and a growing number of borrowers defaulting on loans because of
a struggling economy, the pressure can only be sustained for so long. Eventually,
there is not enough money left to continue making new loans and the best thing
a bank can do is tighten up with credit and protect itself from further damage.
Beyond investing in the American financial system, European
banks have also loaned money to American banks. Those American banks are now being
bailed out by their government to avoid complete collapse. Add into all of this
the loose lending practices of the European banks as well and you a worldwide
system struggling not only because of their own actions, but because of the actions
taken by allies in the business world as well. Even smaller
countries are feeling the effects of the credit crunch trickling down from larger
economies in Europe and the U.S. The days of isolationism and protecting yourself
from the failures elsewhere in the world are over. The world is now dependant
on exports and worldwide trades that affect the marketplace in even the smallest
of economies. The credit crunch in Europe is being combated
with massive amounts of government money poured into the banking system, but so
far the crunch has not been relieved. It is predicted that an upturn in the worldwide
economy could take some time to occur.
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