- In the early 2000s, US banks invented subprime , a credit that allows you to lend a lot to small consumers who would usually have trouble repaying their debt, by allowing them to pledge their house.
- The interest rate depends on the value of the house:the higher the value, the lower the interest rate. Many European banks are investing in these flourishing loans, advantageous for low-income households:the subprimes represented 13% of loans in 2007.
2007
Procedure
The value of real estate continues to climb, until 2007 when it collapses. Interest rates are soaring, and millions of Americans can no longer repay their debt. The crisis is spreading to US banks, which have lost huge amounts of assets. They are forced to sell shares in order to alleviate the liquidity crisis, but thus cause the stock market to fall.
On September 15, 2008, the major US bank Lehman Brothers went bankrupt, causing panic in the international market.
Because of the investments of European banks in subprime (this is the case of BNP) and the interconnection of economies, the crisis is spreading in Europe and around the world.
Consequences
- Banks are the first to be affected; the IMF estimates the cost of the crisis to US banks alone at 2,200 billion dollars. These can no longer lend to households, which causes a drastic drop in purchasing power.
- Central banks in affected countries such as the Central Bank of the United States (Fed) and the European Central Bank (ECB) are trying to fill bank failures and shortcomings in the economy; countries are therefore going into enormous debt, and there are now fears of the insolvency of many countries in the euro zone.