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Last Updated: Friday, 10 August 2007, 16:25 GMT 17:25 UK
What's behind the credit crunch?
Billions of pounds, euros and dollars have been wiped off the value of listed companies across Europe and the US.

Analysts give their views on why there has been such a violent correction.

BARNABY MARTIN, MERRILL LYNCH

There are a lot of things happening.

Two to three months ago, the credit markets started to get worried about the fall-out from the sub-prime market in the US.

Most of these sub-prime loans are packaged up and then sold on as structured products to financial institutions such as banks, insurers and hedge funds.

It allows banks to get the sub-prime loans off their balance sheets.

Now it looks like the holders of these structured products are going to suffer large losses because there will be many more sub-prime loan defaults than the rating agencies first forecast.

This is because, in the US, interest rates are rising, house prices are falling and people can't refinance as quickly as first thought.

The problem is that if sub-prime is doing badly then there is a risk that no one wants to buy structured products of any type. And that's one of the main reasons why the equity markets are falling.

There has been a lot of leveraged buyouts in the US helping push up the value of equities, financed by debt and underwritten by American and European banks.

The way this works, is that the banks will initially provide a bridging loan type of financing, but then ultimately look to syndicate the debt away to other banks or hedge funds.

The problem now is that the buyer base is more uncertain amid all the problems.

The world of cheap debt was one reason that equities kept going up. Now loan or bond issuance looks more uncertain.

The short term remains very uncertain given we will get more headlines on banks' exposure to sub-prime in the weeks ahead.

There has certainly been a violent correction in the credit market.

STATE STREET GLOBAL MARKETS

Market participants don't know whether to buy on the rumour and sell on the news, do the opposite, do both, or do nothing, depending on which way the wind is blowing. The atmosphere is febrile.

Institutional investors have responded by reining in risk in their portfolios.

HOWARD ARCHER, GLOBAL INSIGHT

The sharp falls in global stock markets obviously affect consumer wealth, which again could dampen spending. Pension schemes will also be adversely affected.

However, the current losses have to be put into perspective against the past gains that have been made.

Again, much depends on the speed and extent of the equity market falls. Is this just a correction, or is it the start of something deeper?

There is a danger that financial market turmoil and tighter credit will hurt the mortgage and housing markets in the UK and eurozone.

This increases the risk that the UK housing market could see a sharp slowdown, and sub-prime mortgage problems could become more apparent (although on a markedly lesser scale than in the US).

In the eurozone, Spain and Ireland could suffer similar problems.

SIMON DENHAM, CAPITAL SPREADS

At the moment, it seems that nearly every financial market is becoming increasingly violent.

This is odd because normally whilst we may have chaos in one sector, another is generally peaceful.

Yesterday saw commodities, currencies, equities and bonds all have exceptional trading ranges.




MARKET DATA - 11:36 UK

FTSE 100
5429.64up
23.70 0.44%
Dax
5733.05up
19.54 0.34%
Cac 40
3784.02up
14.48 0.38%
Dow Jones
10403.79up
78.53 0.76%
Nasdaq
2273.57up
35.31 1.58%
S&P 500
1115.71up
11.22 1.02%
BBC Global 30
5707.15up
20.65 0.36%
Data delayed by at least 15 minutes


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