Page last updated at 08:54 GMT, Friday, 7 August 2009 09:54 UK

Timeline: Credit crunch to downturn

Lehman Brothers world headquarters is shown in New York
Lehman Brothers was the first major bank to collapse in the credit crisis.

The full story...

Two years ago, few people had heard of the term credit crunch, but the phrase has now entered dictionaries.

Defined as "a severe shortage of money or credit", the start of the phenomenon has been pinpointed as 9 August 2007 when bad news from French bank BNP Paribas triggered sharp rise in the cost of credit, and made the financial world realise how serious the situation was.

The roots of the credit crunch, however, started earlier.

A quick guide to the origins of the global financial crisis.

FINANCIAL CRISIS: HOW IT HAPPENED

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Most analysts link the current credit crisis to the sub-prime mortgage business, in which US banks give high-risk loans to people with poor credit histories.
These and other loans, bonds or assets are bundled into portfolios - or Collateralised Debt Obligations (CDOs) - and sold on to investors globally.

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Falling house prices and rising interest rates lead to high numbers of people who cannot repay their mortgages. Investors suffer losses, making them reluctant to take on more CDOs. Credit markets freeze as banks are reluctant to lend to each other, not knowing how many bad loans could be on their rivals' books.

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The impact of the sub-prime mortgage crisis is quickly shown to have implications beyond the United States. Losses are felt by investment banks as far afield as Australia. Firms cancel sales of bonds worth billions of dollars, citing market conditions.

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The US Federal Bank and the European Central Bank tries to bolster the money markets by making funds available for banks to borrow on more favourable terms.
Interest rates are also cut in an effort to encourage lending.

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But the short-term help does not solve the liquidity crisis - or availability of cash for banks - as banks remain cautious about lending to each other.
A lack of credit - to banks, companies and individuals - brings with it the threat of recession, job losses, bankruptcies, repossessions and a rise in living costs.

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UK bank Northern Rock seeks an emergency loan to stay afloat, prompting a "run" on the bank, as worried customers withdraw 2bn. The bank is later nationalised. In the US, the near-collapse of Bear Stearns leads to a crisis of confidence in the financial sector and the end of investment-only banks.

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Seeking a long-term solution, the US government agrees a $700bn bail-out that will buy up Wall Street's bad debts in return for stake in the banks. The US government plans to borrow the money from world financial markets and hopes it can sell the distressed assets back once the housing market has stabilised.

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The UK government launches its own bail-out, making 400bn extra capital available to eight of the UK's largest banks and building societies in return for preference shares in them. In return for its investment, the government expects to get a stake in the banks - although exactly how much is not quite clear yet.

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Economies around the world are affected by the credit crunch. Governments move to nationalise banks from Iceland to France. Central banks in the US, Canada and some parts of Europe take the unprecedented step of co-ordinating a half-point percent cut in interest rates in an effort to ease the crisis.

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Shares have risen and fallen with news of failures, takeovers and bail-outs. In part, this reflects investors' confidence in the banking system. While bank shares have been hammered because of bad debts, retailers have been hit as consumer confidence is shaken by falling house prices and job insecurity.

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SUB-PRIME PROBLEMS

Between 2004 and 2006 US interest rates rose from 1% to 5.35%, triggering a slowdown in the US housing market.

Homeowners, many of whom could only barely afford their mortgage payments when interest rates were low, began to default on their mortgages.

Default rates on sub-prime loans - high risk loans to clients with poor or no credit histories - rose to record levels.

The impact of these defaults were felt across the financial system as many of the mortgages had been bundled up and sold on to banks and investors.

WARNING SIGNS

April 2007

New Century Financial, which specialises in sub-prime mortgages, files for Chapter 11 bankruptcy protection and cuts half of its workforce.

As it sold on many of its debts to other banks, the collapse in the sub-prime market begins to have an impact at banks around the world.

July

Investment bank Bear Stearns tells investors they will get little, if any, of the money invested in two of its hedge funds after rival banks refuse to help it bail them out.

Federal Reserve chairman Ben Bernanke follows the news with a warning that the US sub-prime crisis could cost up to $100bn (£50bn).

THE SCALE OF THE CRISIS EMERGES

9 August 2007

BNP Paribas sign
BNP's statement is scary, to put it mildly
BBC Business Editor, Robert Peston

Investment bank BNP Paribas tells investors they will not be able to take money out of two of its funds because it cannot value the assets in them, owing to a "complete evaporation of liquidity" in the market.

It is the clearest sign yet that banks are refusing to do business with each other.

The European Central Bank pumps 95bn euros (£63bn) into the banking market to try to improve liquidity . It adds a further 108.7bn euros over the next few days.

The US Federal Reserve, the Bank of Canada and the Bank of Japan also begin to intervene.

17 August

The Fed cuts the rate at which it lends to banks by half of a percentage point to 5.75%, warning the credit crunch could be a risk to economic growth.

A RUN ON A BANK

4 September

The rate at which banks lend to each other rises to its highest level since December 1998.

The so-called Libor rate is 6.7975%, way above the Bank of England's 5.75% base rate; banks either worry whether other banks will survive, or urgently need the money themselves.

13 September

Northern Rock branch
The fact that it has had to go cap in hand to the Bank is the most tangible sign that the crisis in financial markets is spilling over into businesses that touch most of our lives
Robert Peston, BBC business editor

The BBC reveals Northern Rock has asked for and been granted emergency financial support from the Bank of England, in the latter's role as lender of last resort.

Northern Rock relied heavily on the markets, rather than savers' deposits, to fund its mortgage lending. The onset of the credit crunch has dried up its funding.

A day later depositors withdraw £1bn in what is the biggest run on a British bank for more than a century. They continue to take out their money until the government steps in to guarantee their savings.

18 September

The US Federal Reserve cuts its main interest rate by half a percentage point to 4.75%.

19 September

After previously refusing to inject any funding into the markets, the Bank of England announces that it will auction £10bn.

MAJOR LOSSES BEGIN TO EMERGE

1 October

Swiss bank UBS is the world's first top-flight bank to announce losses - $3.4bn - from sub-prime related investments.

The chairman and chief executive of the bank step down. Later, banking giant Citigroup unveils a sub-prime related loss of $3.1bn. A fortnight on Citigroup is forced to write down a further $5.9bn. Within six months, its stated losses amount to $40bn.

30 October

Merrill Lynch's chief resigns after the investment bank unveils a $7.9bn exposure to bad debt.

HELP IS AT HAND

6 December

US President George W Bush outlines plans to help more than a million homeowners facing foreclosure.

The Bank of England cuts interest rates by a quarter of one percentage point to 5.5%.

13 December

The US Federal Reserve co-ordinates an unprecedented action by five leading central banks around the world to offer billions of dollars in loans to banks.

The Bank of England calls it an attempt to "forestall any prospective sharp tightening of credit conditions". The move succeeds in temporarily lowering the rate at which banks lend to each other.

17 December

The central banks continue to make more funding available.

There is a $20bn auction from the US Federal Reserve and, the following day, $500bn from the European Central Bank to help commercial banks over the Christmas period.

NEXT UP: THE BOND INSURERS

19 December

Ratings agency Standard and Poor's downgrades its investment rating of a number of so-called monoline insurers, which specialise in insuring bonds. They guarantee to repay the loans if the issuer goes bust.

There is concern that insurers will not be able to pay out, forcing banks to announce another big round of losses.

9 January 2008

The World Bank predicts that global economic growth will slow in 2008, as the credit crunch hits the richest nations.

21 January

Global stock markets, including London's FTSE 100 index, suffer their biggest falls since 11 September 2001.

22 January

The US Fed cuts rates by three quarters of a percentage point to 3.5% - its biggest cut in 25 years - to try and prevent the economy from slumping into recession.

It is the first emergency cut in rates since 2001. Stock markets around the world recover the previous day's heavy losses.

31 January

A major bond insurer MBIA, announces a loss of $2.3bn - its biggest to date for a three-month period -blaming its exposure to the US sub-prime mortgage crisis.

BIG NAME CASUALTIES

7 February

US Federal Reserve boss Ben Bernanke adds his voice to concerns about monoline insurers, saying he is closely monitoring developments "given the adverse effects that problems of financial guarantors can have on financial markets and the economy".

The Bank of England cuts interest rates by a quarter of one percent to 5.25%.

10 February