The British pound is losing massively in external value, interest rates are rising rapidly and the central bank, the Bank of England, has already had to step in and bail out pension funds. How bad will it hurt? Economists are already warning of large distortions, including in the real estate market.
With large rate hikes in the US, the Federal Reserve has put pressure on other central banks. Because they had to follow suit to avoid a massive devaluation of their currencies, which also put a strain on the financial markets. The British are feeling particularly hard as their currency has been falling against the US dollar for months.
As a result, the cost of mortgages, for example, has skyrocketed, and many borrowers have to pay much more for their properties purchased on credit. Then report the “Sun‘that with the fixed rate increase from 2.34 per cent to 6 per cent, an average mortgage of £ 200,000 now costs £ 1,288 a month, down from £ 881. That’s 407 pounds (or just under half) more than before. With Brits already struggling with skyrocketing electricity bills, which also mean high monthly overheads, a wave of defaults is only a matter of time.
Especially economists warn in a loud voice “To express“Has already warned that property prices could fall by 15 percent in a very short time. The strongest nightcap since the 2008/2009 financial crisis. This would mean that many mortgage-financed properties would end up in foreclosure, putting heavy pressure on the UK banking sector. But given the current energy crisis and the promised additional spending, London is not prepared for the bailouts.
At the end of September alone, the Bank of England (BoE) intervened with approximately $ 72 billion in the bond markets and bought long-term UK government bonds to reject margin calls. According to Jon Cunliffe, Deputy Governor for Financial Stability, the UK central bank has thus prevented the collapse of pension funds. More than a trillion (1 trillion) pounds has been invested there in so-called responsibility-oriented investment strategies (LDI). “If the bank had not intervened on Wednesday 28 September, a large number of pooled LDI funds would have had negative net assets and faced shortages of collateral provided to the banks’ counterparties. [Die Investitionen] of pension funds in these aggregate LDI funds would be worth zero, “Cunliffe said aloud.Business Insider“.
“If the LDI funds failed, the banks that lent money to those funds could have sold the large amount of government bonds they held as collateral on the market. This would increase tensions in the financial system and further affect the bond market, which in turn would force other institutions to sell assets to increase liquidity and contribute to a self-reinforcing decline in asset prices, ”he said. The BoE urgently needed to prevent such a collapse. This is because if bond yields rise but prices fall, lenders can demand more collateral from bondholders, forcing them to offload assets to market. This is the only way they would be able to meet margin calls. This will trigger a downward spiral in prices, causing the entire system to collapse.
All in all, Britain is currently on the verge of a full-fledged financial crisis, which would also have far-reaching global effects given the internationally interconnected British financial markets. A scenario that is also of great concern on the European continent, above all because the situation is also tense there.
