Credit Derivatives : financial impact on the UK and America Essay Example

equity. There is also a chance of increased default rates on credit cards and car loans, although this possibility might be reduced due to higher short-term expenses. Additionally, individuals in the UK and other countries with negative equity might choose loan defaults when house prices decrease, which could result in major losses for the banking sector.

Experts predicted that the recession in the United States would have a global impact, including on the United Kingdom. The crisis caused by credit derivatives failure in the US affected other countries depending on which areas were impacted and how it affected their banking systems. According to Ray Barrell and Ian Hurst, if losses were evenly distributed, both the UK and Euro Area would experience decreased growth. They projected that UK growth this year could be as low as 1.4% and slightly under 1% next year, while Euro Area growth could slow down to approximately 1.2% annually. These declines could worsen due to problems within these countries and in the US. Economic data from 2009 and 2010 has confirmed these predictions, reaffirming the heavy reliance of the UK economy on the performance of the American economy.

During the early stage of the recession, businesses are anticipated to increase their bank borrowing in order to navigate the crisis. However, lending to UK businesses has been decreasing, indicating a decline in lending by both UK and foreign banks to non-bank businesses. Analysts in finance argue that this decrease is mainly caused by a reduction in lending from foreign banks. Nevertheless, sterling lending from UK banks continued to rise. Therefore, the first phase of the crisis, which was marked by the failures of Northern

Rock and Bradford and Bingley, did not have a significant impact on business lending. (Weale, 2009)

The true connection between the financial markets of the United States and the United Kingdom was not fully understood until major institutions like Lehman Brothers went bankrupt in September 2008. After this event, UK banks also became more cautious, as seen in the monthly data on lending by UK monetary sector institutions (M4) until December 2008. The data reveals a decrease in loans to UK business corporations by UK banks during the last quarter of 2008, along with a significant decline in secured mortgage lending and unsecured consumer credit lending to individuals. Lending to small businesses remained unchanged. Therefore, the second phase of the crisis impacted UK banks' willingness to lend to British businesses, highlighting their reliance on the US market. Consequently, both success and failure of complex financial products such as credit derivatives can have global consequences.

It is evident that the recovery in financial markets must occur simultaneously since there is a strong relationship between them. This means that in order to enhance the efficacy of fiscal policy measures planned by the governments of the US and UK, it is crucial that their execution is properly synchronized.

According to Hawser (2009), the impact of fiscal policy will be enhanced through spill over effects, as increasing GDPs will stimulate the exports of each country's trade partners through international trade linkages. The effects of coordinated fiscal policy actions, when undertaken by all economies simultaneously, are typically greater than those seen when policies are carried out in isolation.

Barrell, R., Fic, T., & Liadze, I. (2009). Fiscal Policy Effectiveness in the Banking Crisis. National

Institute Economic Review, (207), 43+.

Barrell, R., & Hurst, I. (2008). Financial Crises and the Prospects for Recession. National Institute Economic Review, (204), 33+.

Decomposing the Global Recession. (2008). National Institute Economic Review, (206), 74+.

The article titled "Countries Count Cost of Credit Crisis" by Hawser (2009, May) is featured in Global Finance, volume 23, page 8.

Recession in the Euro Area occurred in 2009, as reported by the National Institute Economic Review in issue number 209. The article is titled "Recession in the Euro Area" and it can be found on page 22 or higher.

Weale, M. (2008). Commentary: The Banking Crisis and the Economy. National Institute Economic Review, (204), 4+.

Weale, M. (2009). Data on the Credit Crunch. National Institute Economic Review, (207), 71+.

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Market economies often go through periods of economic prosperity and downturn. The most recent example of this was the global recession in 2008, which is predicted to occur again in the future. Although less severe than pre-World War II recessions, these crises highlight substantial deficiencies in government policies worldwide. Moreover, due to the current neoliberal global economic system, national economies are closely linked. Therefore, no country can shield itself or its citizens from the repercussions of such a crisis. This interconnectedness becomes apparent when examining data on the recent worldwide economic recession triggered by the collapse of credit derivatives (Weale).