The credit crunch that never ends

One analyst calls this the summer that will never end. All view this as the continuation of debt emergence, against the backdrop of short-term turmoil and economic downturn.

Libor spreads in Europe's interbank market jumped to 64 basis points, roughly the level that set off the credit crisis last summer and prompted a liquidity rescue by the European Central Bank. The iTraxx Crossover index that measures spreads on corporate bonds has jumped 100 basis since last week to 364 yesterday.

"It's the summer that won't end," said Peter Berezin, a strategist at Goldman Sachs.

He said investors were shaken by last week's drop in US home-builder sentiment to an all-time low and by fresh falls in the ABX index for sub-prime debt. "We continue to learn that it pays to respect the sell-offs in ABX and housing-related credit. This has elements of the February and August sell-offs, where credit markets signalled problems," he said.

This is the volatile activity against which warning signals about the British economy are winking amber. More and more economists are questioning the foundations of the British economy, pointing to the high debt burden, public sector splurge, poor infrastructure and low skills.

An economic downturn may be further exacerbated by inflation creeping in. Food prices have increased and families are paying more for staples: a development that hits the poor worse:

Economists have been warning for some time that the crisis in some key commodity markets – especially the dairy market – would eventually hit shoppers in the UK. David Lang, a food analyst at Investec, said: "It's only starting to filter through to consumers now. But it will go on for some months to come. Prices will have to be raised again."

Sean Carter, at the Rural Shops Alliance, said: "Supermarkets keep their prices very sharp on certain items, and claim there is a continual price war going on. But, in actual fact, their profit margins never seem to fall. You can be sure that if they cut the prices on some items, they are increasing prices on other items."

The gloss is beginning to come off Brown's custodianship of the economy. It is clear that he did not tackle any longterm problems and relied on state spending to mask this lack of policy.

Link - Via The Bewilderness