While it was the sub-prime mortgage collapse in North America that officially triggered the Great Recession of 2008, this was indicative of a global trend for irresponsible lending and worthless loans. The UK was no exception to this rule, with the rise of 100% mortgages and lax lending criteria pre-empting a significant economic decline.
Initially, the global economy appeared to heed the harsh lessons of indiscriminate borrowing, as lenders became more stringent when laying down criteria to customers. This type of regulated lending became commonplace throughout the financial sector, as banks looked to ensure that all debts could be managed and repaid effectively.
Despite this and the subsequent economic improvement, we may well be about to enter a further period of recession. After all, regions such as the Eurozone continue to be encumbered by unmanageable debt levels, while consumers across the globe continue to spend and borrow outside of their existing means.
Heralding the Dawn of Another, Global Recession
In specific terms, the markets were rocked earlier this year by the return of the so-called 100% mortgage in the UK. Considered to be a key contributor to Britain’s economic decline in 2008, this type of mortgage enables aspiring home-buyers to secure a required loan without any form of a deposit. Barclay’s were the first lender to re-introduce this controversial option to customers, in the form of a three-year deal at a fixed rate of 2.99%.
While this risk is offset by the requirement that the lender’s friends or family members contribute 10% of the property value into a Barclay’s saving account for this three year period, it means that customers can now borrow up to 5.5 times their salary (as opposed to 4.4 times previously).
As if this worrying portent was not enough, we must also consider the banking crisis that continues to undermine the stricken Eurozone. The recent rejection of constitutional change in member nation Italy (and the subsequent resignation of Prime Minister Matteo Renzi) has highlighted an underlying issue with the national banking sector, and one which is indicative of the European Central Back (ECB) and the financial issues that continue to plague the Eurozone.
More specifically, banks in Europe (and specifically Italy) are laden with non-performing loans, which have already incurred defaults and are unlikely to ever be paid in full. These include private loans and those that have been extended by the ECB to aid countries such as Greece, but the most worrying aspect of these debts is that the banks refuse to write these off or reconsider their total value. So while billions of pounds are recorded as being owed to European banks, most individual loans are only worth between 45% and 50% of their original value.
The Bottom Line
The decline of the European economy and financial system, coupled with the return of reckless borrowing, has even prompted Wall Street expert Steve Eisman to forecast another bout of global recession. Eisman, who successfully predicted the 2007 sub-prime mortgage collapse and profited by short-selling supposedly A-rated securities, believes that the current level of debt in the global economy cannot be sustained indefinitely without significant reform or a willingness to re-appraise the total of money that is currently owned by households, businesses and national governments.
This is a stark warning, and one that is becoming more credible with every passing day. After all, how can UK lenders offer 100% mortgages in an economic climate where wages are unlikely to grow discernibly for the next decade?