'Life changed on 9 August," says Northern Rock's former chief executive, Adam Applegarth, reflecting on the day last summer when his life and his bank fell apart. "That was when the markets froze."
No one will be celebrating the anniversary of the start of the credit crunch this week, and there are few prepared to claim we are even halfway into this global crisis. "There's no way of knowing when it's going to end," confesses Alex Potter, banking analyst at broker Collins Stewart.
Last week Sir James Crosby, the head of HBOS when its Halifax and Bank of Scotland divisions were leading British banks into the crunch, presented the Government with a report saying the housing market will remain in the mire until at least 2010. His old bank reported first-half profits down 72 per cent at £848m.
In the United States – where sub-prime mortgage lending is blamed for the squeeze that has made banks around the world reluctant to lend to each other – Merrill Lynch announced new writedowns and the injection of $8.5bn (£4.3bn) through the sale of new shares, with the takers being the sovereign wealth funds that have been bailing out financial institutions in the West. Banks are now estimated to have written off almost £250bn assets since last August.
And the problems are spreading, with evidence that what began as a financial sector crisis is developing into a business slump. Both Woolworths and Next reported falling sales last week.
With asset prices – from property to shares – on the slide and inflation rising, the current crunch is being compared to the 1970s. But then, Britain had a secondary banking crisis and the big institutions formed a lifeboat to rescue those overstretched secondary firms. This time the major banks are in trouble, with no larger organisations to turn to for help.
In Britain, Royal Bank of Scotland, Barclays, HBOS and Bradford & Bingley have all raised new capital, while Alliance & Leicester has sought the comfort of a new Spanish parent.
While the primary banks had the balance sheet strength to rescue smaller lenders 30 years ago, only governments can keep the big banks afloat now. The state has taken over Northern Rock directly, and through the Bank of England it is injecting £50bn or more into other mortgage lenders to refinance existing home loans, with calls last week for a similar sum to provide funds for new property purchases.
But foreign government agencies, particularly those with reserves boosted by high oil prices, are using the crisis to buy into Western banks. Merrill Lynch's share issue last week will go to sovereign wealth funds in Kuwait and Singapore.
Qatar took a 7.7 per cent stake in Barclays' recent £4.5bn refinancing, with Singapore and China buying smaller holdings, and Citigroup turned to Abu Dhabi for new capital.
Banks are also seeking asset sales to free capital and generate cash – like Royal Bank of Scotland's disposal of its joint-venture stake to Tesco last week, the sale of its train-leasing division and attempts to find buyers for its insurance subsidiaries.
Mamoun Tazi, banking analyst at MF Global, is sanguine that when credit markets do unfreeze, sovereign funds will be holding big tranches of Western banks' shares. "If they weren't there, we'd be in a worse position. They've decided to come and help and ultimately they will reap the rewards of their investment."
Even though they have raised more than £20bn, City analysts aren't convinced Britain's banks have sufficient capital. But after the debacles of Bradford & Bingley's fund raising – which had to be repriced and revised twice – and with 92 per cent of shareholders rejecting HBOS's £4bn rights issue, they believe the sector has slammed the door on such issues and locked itself out.
"After the size of HBOS's failure, the price of underwriting an issue will be impossible for others," says Mr Potter at Collins Stewart.
"There will now be pressure from central banks to take the big red pencil to dividends."
Mr Potter adds that, usually, a credit crunch follows a recession. "This time we've had the crunch first," he says. But if the economy grinds to a halt or goes into reverse, that will add to the banks' problems as customers – both corporate and personal – default on loans. "I think we're on the way into recession and we'll see mortgage losses greater than in the early 1990s," he warns. For banks that have so far written down the value of financial instruments, that will mean a new round of provisions on their direct lending.
Paul Dales, UK economist at consultancy Capital Economics, is also preparing for recession, admitting: "It's more likely than not. Consumers are going to get hit hard by a combination of the housing market downturn and inflation.
"We see growth falling from 2 per cent this year to flat next year and companies will see their profits fall sharply and won't be able to borrow."
As the financial crisis becomes a business crisis, Mr Dales predicts that unemployment will increase from 1.6 million people to 2.5 million. And while falling house prices do not hit pockets, lost jobs do.
"Unemployment is a lagging indicator and will take some time," he adds, adding weight to fears that the anniversary of the credit crunch may not mark the halfway point.
The weakness of the US housing sector should have given warning that financial markets were unstable early last year. But it was only on 9 August, after the French bank BNP Paribas suspended three of its funds with exposure to American sub-prime losses, that banks stopped lending to each other. They were unsure about the quality of the complex instruments they had traded between themselves.
The liquidity crisis pushed up interest rates and forced lenders to seek help from central banks. Among them was Mr Applegarth's Northern Rock, and when its problems raising wholesale finance became known, they were exacerbated by a public run on the bank to withdraw private savings.
If the start of the crunch can be dated to that day 12 months ago, there will be no single time when it ends. No all-clear will be sounded to indicate the crisis is over. Some sectors of the economy will have escaped the squeeze while others continue to be crushed. For some businesses, the effects of the crunch will last for years; others will not survive to see the recovery.
For Mr Dales, the signal that the crunch is ending will be the rates at which banks lend to each other returning to historic levels. The rate is still 80 basis points above the overnight cost of money – better than last autumn's 150 points but well above pre-crunch levels of just 15.
Mr Potter says: "We need to see asset prices stabilise and the reopening of the securitisation markets for banks. But even then it's going to take time to feed through to the consumer."
Mr Tazi believes ministers must kickstart the economy to prevent a long slump. "We're in the middle of a downturn," he says. "How quickly we get out depends on whether the Government puts in place a package to stimulate the economy and cut interest rates."
Ministers and the Bank of England have been criticised for dithering during the first year of the credit crunch. As we enter what could be the second of several years, the pressure is for decisive action with the hope that recession will curb inflation while lower interest rates curb the recession.Reuse content