The credit crunch and the debt crisis
What's the difference between a credit crunch and a debt crisis? About $2 trillion worth of political will. Jubilee Debt Campaign's updated briefing compares today's financial crisis with the developing country one that is still unresolved.
The “credit crunch” which has caused chaos in the financial markets, and led to the onset of recession in the rest of the economy, has been explained as a lack of liquidity, or credit, available to banks on the international markets. Inject these markets with enough liquidity, restore lenders’ confidence enough to start lending again, and everything will come right. Hence the $700 billion US bail out, and our own British bail out.
But is that the full story? In fact the problems faced by the banks and the economy are not so much about a lack of available credit, but a massive over-accumulation of debt. Debt is a sum of money, or other obligation, owed to someone. Taking out a loan – getting into debt – is a means of using future purchasing power in the present. Banks lent to mortgage borrowers, increasingly recklessly. These debts were repackaged and sold on, in ever more complicated “derivatives” which investors themselves mostly did not understand. As it became apparent that these sub-prime debts could not be repaid, international banks and investors found themselves hugely exposed to bad debts and have gone into free-fall. All that is left is a huge pile of debt. This is a story about a debt crisis, not a credit crunch.
Not only are we witnessing a debt crisis, but it bears a strong resemblance to the debt crisis that poor countries have faced since the early 1980s. Andrés Velasco, Chile’s finance minister, recently stated that the credit crunch is “a more modern and a much bigger version of what we have seen in emerging markets over the last couple of decades.” In other words, a new form of debt crisis, but this time affecting the rich world.
>> DOWNLOAD THE FULL 4-PAGE BRIEFING (PDF) (UPDATED NOV 2008)
