Between a rock and a hard place

12 September 2007

As the credit crunch comes to a head, the world’s leading financial institutions are beginning to count the cost, say Allister Heath, Helen Dunne and Tom Burroughes

Credit markets never seem to get the balance right: the choice always seems to be between too much money available to borrow, or too little. Only a few weeks ago a wave of liquidity was gushing through the markets, lifting all in its path and fuelling fears of the return of irrational exuberance. Today, liquidity has vanished, the supply of credit has fallen to a trickle and the banks and other financial institutions at the heart of the City of London have been left high and dry, desperate to prevent today’s crisis from turning into a catastrophe.

The great credit crunch of the summer of 2007 is fast coming to a head. Vast amounts of short-term loans, mainly extended to shadowy City investment funds known as conduits and structured investment vehicles (SIVs), will become due over the next few days; nobody is quite sure how they will be paid off. Usually, new loans would simply be taken out to pay off the expiring ones, the debt rolled over. This is no longer an option: the cost of borrowing has surged over the past two months while the availability of credit has shrunk drastically.