New credit crunch may be on way as banks downgraded

A series of banks have been downgraded by ratings agency Moody's due to their perceived high level of exposure to eurozone debt.

The agency has passed such a judgement on 15 high street and investment banks, including Barclays, HSBC and Royal Bank of Scotland.

Barclays was lowered by two notches and the other banks by one, with the consequence being that the perceived higher risk involved in investing in these firms is likely to raise the rate at which they can borrow money – a situation that in turn could force them to put up interest rates for customers.

That would echo the situation in the credit crunch that began in 2007, when doubts about the futures of various banks sent interbank lending rates soaring and saw lending to businesses and consumers curbed.

It could mean those with mortgages see higher charges imposed and lending may only be available at a higher rate, while a new credit crunch could further depress the economy at a time when it is already in recession. 

This means that while consumers taking on borrowing may find they are in more debt because their borrowing costs are higher, others who are managing to pay what they owe now could lose the ability to do so due to losing their jobs if a deeper recession takes hold.

One hope may be that similar problems do not affect other UK banks, enabling them to keep lending, while recently-announced government plans of extra liquidity for banks provided it goes straight into lending may also help prevent a repeat of the 2007 crunch.

In a speech yesterday, director-general of the Confederation of British Industry John Cridland outlined a series of measures he said were vital to ensure the economy recovers.

These include advocating further quantitative easing, an increase in non-bank finance for mid-size businesses and using government finance to boost exports and make the NewBuy scheme more attractive for first-time buyers.

By James Francis