Overview of Economic Context

The world’s financial markets have recently experienced massive changes, which began to rear their head in Spring 2007. Although this can be attributed to many factors, many experts believe that this crisis arose as a result of banks lending too much money to sub prime mortgage markets, large proportions of which could not afford to maintain repayments. This in turn led to a shortfall of money within the banking sector, with many banks being unwilling to lend to each other. Financial institutions and systems globally have suffered as a result of this lack of money flow; the first bank within the UK to collapse was Northern Rock, who had offered many clients up to seven times their annual earnings at a very low interest rate. Following media publication that they had taken an emergency Bank of England loan, many individuals with savings accounts withdrew their savings deposits and other institutions refused to lend. The increasing unwillingness of the banks to lend money led to the use of the phrase ‘Credit Crunch’ to describe market changes. The UK economy, which had already been experiencing a slowdown in growth, has recently entered a recession which Ernst & Young predict will continue throughout 2009, with negative growth of around 1% during this period before gaining back this 1% in 2010.