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Date Published : Thursday, January 31, 2008
In recent weeks, stock markets across the globe have taken a bit of a bashing. Billions of dollars have been wiped off the values of some of Australia's biggest companies, with many superannuation funds also being affected.
Through it all, however, one word is being used as an excuse and reason for the sudden downturn in the global economy. Subprime.
We've probably all heard it mentioned on the nightly news and on the internet, but the vast majority of people do not have a clue what it means. It does, however, affect all of us.
Subprime lending is the practice of lending funds to borrowers who might not otherwise qualify for a loan, whose credit rating is bad or financial situation unclear. These borrowers are considered to be a higher risk than others and so, sub-prime loans (and credit cards) have higher interest rates.
Last August, the markets in the US became aware of an unusually high sub-prime lending rate and it had a negative effect on the markets.
Following the US lead, the Australian stock market has also been battered. This situation is called financial contagion - when the asset values in one country negatively impact the economy of another country (and can affect the availability of credit in the other country).
In Australia, hedge fund Basis Capital and RAMS Home Loans were early casualties and Centro Properties Group is fighting off liquidation after failing to roll over its debt funding.
As a result, banks are losing money and having to raise interest rates on variable home loans - for example - in order to recoup their losses.
It affects every one of us and looks set to continue dominating the financial sector during 2008.
Find and apply online for loan deals.
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