16 July 2008

Credit Crunch Carnage

Fallout from the US sub-prime market collapse which spread throughout Britain, France, Germany and Japan has now reached our shores.

Much of the credit offered by Australian financial institutions has traditionally been sourced offshore, so it is with interest that we look at the recent write-downs by international lenders, and consider the impact on our own economy.

During the last six months, international lenders who had carried assets at inflated values for many years have been forced to mark to market their balance sheets, resulting in significant portfolio write-downs.

The significance of write downs to date is showing current year write-downs in excess of US$337bn. Of particular interest is the inclusion of blue chip banks, including Citigroup US$69bn, UBS US$45bn, Merrill Lynch US$38bn and Morgan Stanley US$23bn.

With their balance sheets eroded international banks are protecting themselves against further losses by imposing tougher lending criteria on borrowers and by increasing the cost of credit via higher interest rates.

The fallout from the subprime credit crunch continues to be felt by Australian borrowers with three of the big four banks increasing interest rates beyond RBA official increases again in the past week.

Already showing signs of slow down following four successive interest rate increases by the RBA, the latest un-official interest rate increase is certain to have a further dampening effect on business and consumer sentiment which will inevitably translate into further reductions in discretionary spending, increased mortgagee auctions, corporate liquidation and higher unemployment.

Australia’s economic slowdown has increased the need for specialised corporate turnaround advice.

For more information please feel free to contact one of the team at Vantage Performance.


Michael Fingland
Managing Director

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