The financial crisis

We will probably soon begin to feel the effects of the financial crisis. A brief overview of what we can expect has been prepared by my colleague, Balázs Lapis. „It all began in 2000, when investment focused economic policy was adopted by the US, in order to boost employment and reduce the influence of speculation. As a result of falling interest rates, there was no point in keeping money in bank accounts, so everybody started to invest, particularly in real estate development. Incredible amounts have been disbursed with practically no collateral to guarantee these loans. By 2003, the prime lending rate was down to 1 percent in the US. Everybody was buying shares and the market was “regulating” itself. Banks have soon run out of their own resources, so they began selling securities linked to real estate in Europe and Asia. In the Asian market however, government securities remained dominant. This was when problems began. The market of real estate financing had been saturated, with Asian and Arab countries staying away. Though signs giving cause to alarm were already visible, Fitch, Standard & Poor’s, and Moody’s were still rating such securities as excellent in 2006-2007. Soon, the whole system began to crumble like dominoes. The biggest amounts of money are concentrated in the hands of health insurance and retirement funds. American banks have not only lost their private deposits but also their collateral for future liabilities. Total assets of American retirement funds have dropped by USD 670 billion in six months. Western European retirement funds have lost USD 600 billion, while Central European retirement funds have lost 14 billion. In the US and Western Europe, losses amount to 4-8 percent of their total assets, while their own reserves are below 3 percent. The whole pension system might collapse. The Hungarian pension system has lost 20 percent of its assets. Money has also disappeared from stock exchanges. Governments then intervened to save the retirement and health insurance funds from insolvency. The USD has again become the reserve currency, because the US economy is still strong. The individual rescue plans initiated by European governments do not seem very credible, as illustrated by the repeated failure of the Hungarian government to get its bonds listed in Shanghai. The EUR has been replaced by the USD and gold in Far Eastern and Arab countries and Russia. The HUF has to be made attractive, because an exchange rate of HUF 300 to the USD would lead to insolvency within a few days. The prime lending rate has been raised from 8.5 percent to 11.5 percent. Currency based lending has ceased or become much more expensive. HUF based financing has also become too costly. No more cheap consumer credits for Christmas. Terms and conditions will become far stricter for all types of financing. Tax regulations, especially those related to collecting taxes are also to be tightened. The government will exercise a substantial degree of control over banks and pension funds. There are also some optimistic voices, saying that consumption and production will be back to normal by next summer, with the prime lending rate reduced to 6.5 percent.