Credit Crisis Crushing UK Banks

By: Nadeem_Walayat

Many commentators in the mainstream have in recent weeks begun voicing the opinion that the credit crisis may be over or the worst of the crisis is behind us -

Jim Reid, a credit strategist at Deutsche Bank, said: "This is a further sign that the actual credit crisis is easing. Anything that is not complete seizure is encouraging." on news of the HBOS £500 mortgage securitisation deal.

IMF Chief Dominique Strauss-Kahn said, "We have good reason to think that the financial crisis is mostly behind us but it's too soon to say"

However, one of the primary indicators of the depth of the ongoing credit crisis is the interbank LIBOR market which as the below graph clearly indicates that the credit crunch Tsunami waves have turned into a perpetual flood of risk averseness as banks refuse to lend to one another.

The next wave to hit the UK banking sector began in early April 08 and has not only failed to dissipate but intensified due to a series of events such as the rights issue u-turns by Bradford and Bingley which whilst teetering on a Northern rockesque style brink of collapse, buckled and lowered its rights issue price from 82p to 55p and thus letting the underwriters that were squirming to extricate themselves from the deal off the hook. This has had the effect of worsening the credit crisis as the market is now less inclined to entertain emergency cash calls for capital from the banking sector.

Inflation exploding higher in May 08, signals that the banking sector can no longer rely on interest rate cuts to help alleviate the crisis in the housing markets.

Unfortunately there is little the government can do to prevent the surge in, inflation as the primary causes are soaring fuel and food costs. The Bank of England may even be forced to raise rates later in the year, so as to prevent a wage price spiral kicking in which would lead the country into several years of stagflation.

Therefore the overall situation is worsening for the banking sector as the US and UK housing markets will continue to deteriorate. The UK housing market as the below graph illustrates has barely begun its bear market. If the banks are under such pressure this early in the cycle then the expectation is that many of the familiar names around today will not survive this housing bear market and accompanying tightening credit market.

The UK housing market is down 7% over the last 10 months and is expected to decline by a further 8% over the next 14 months, inline with the forecast as of August 2007 for a 15% decline over 2 years. However the trend does not end there as preliminary analysis suggests the housing market could fall by 25% by mid 2011. The consequences for which will be felt in a surge in repossessions far beyond the estimates of 45,000 by the Council of Mortgage lenders. The depression in the banking sector has started to hit the wider economy, this is expected to accelerate in the coming months as without a functioning banking sector everything freezes.

In conclusion, we are no where near the end of this credit crisis, far from it we have yet to pass the mid-way point, as we are only now starting to enter into the stagflation phase, which itself is triggering a relentless wave of Tsunami's that fail to dissipate despite frantic central bank actions.

By Nadeem Walayat

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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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