The story of 2007 was the credit crunch. The story for 2008 will be global recession. Last year, the US home prices collapse was the worst since the Great Depression – a fall of 6% year on year. Starting with the sub-prime defaults, this led to huge markdowns in asset-backed securities and special investment vehicles owned by banks globally.
The sub-prime debacle spread to other credit markets, including inter-bank lending, causing a liquidity squeeze that drove up interest rate spreads to abnormal levels despite the efforts of central banks to inject liquidity and cut policy rates.
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