Can you believe the term credit crunch has entered dictionaries already-

Often defined as a severe shortage of money or credit who are they kidding, Kenyans, no Africans have suffered this so called crunch for years, even decades. So the West is taking its medicine finally, and about time. The start of it all has been pinpointed as 9 August 2007. French Investment bank BNP Paribas caused shockwaves around the world triggering a sharp rise in the cost of credit. In a nut shell this whole problem is all about irresponsible buying and selling of credit, passing on bad debt until no one was left to buy it. 

....................But the story begins in the US sub-prime market, capitalisms at its worst where nobody was refused credit to buy their own home. People who could barely afford the ugali on the table become proud first time home owners, which was fine while interest rates were low. But interest rates rose from 1% to 5.35% (2004 to 2006) triggering a slowdown in the US housing market as defaults on mortgages soared. High risk loans to clients with poor or no credit histories rose to record levels. The US caused this global crisis but cleverly bundled it up and sold on to banks and investors hiding the problem for longer. Many argue the warning signs could have been interrupted when in April 2007 New Century Financial, the sub-prime mortgage specialist, filed for Chapter 11 bankruptcy protection and cuts its workforce in half. As it sold on many of the bad debts to other banks, the collapse of the sub-prime market become unstoppable, with the ripple impacting at banks around the world. Poor hedge fund performances bring Investment bank Bear Stearns to its knees forcing them to tell investors in July 2007 that they will get little, if any, of the money invested. Ben Bernanke of the Fed estimate crisis could cost up to $100bn. He could not be more wrong. On the 9^th August 2007 the scale of the crisis emerges as BNP Paribas cannot value the assets in 2 of its funds, owing to a complete evaporation of liquidity in the market. It is the clearest sign yet that banks are refusing to do business with each other.

The global fight back sees 95bn Euros pumped in by the European Central Bank in an attempt to improve liquidity, adding further 108.7bn days later. The Bank of Canada, the Bank of Japan, and the US Federal Reserve also begin to intervene. For the first time talk of the credit crunch risk to economic growth forces US FED to cut the rate at which it lends to banks by half of a percentage point to 5.75%. Do these rates seem low to Kenyans- Why has access to credit been so affordable and cheap to the West while we pay dearly for financial help- Could this reluctance of our banks to take such risks, actually protected us in the long run. Banks here in Kenya properly charge for services given unlike in the West where charges only really apply if you need credit or misuse your accounts.

Rumours that banks either worry whether other banks will survive, or urgently need the money themselves appear in UK press. On the 13 September 2007 Northern Rock granted emergency financial support from the Bank of England. Northern Rock relied on the markets, rather than savers deposits, to fund its mortgage lending. Poor liquidity and the onset of the credit crunch dried up its funding.  The next day depositors withdraw £1bn in what was the biggest run on a bank for more than a century. Run continues until UK Government steps in to guarantee savings. The pressure on the UK Government was immense as unlike the US FED who was happy just to print more dollars, the UK Government wanted reassurance that good money would not follow bad investments.  Pressure on the Bank of England reaches melting point and on 19^th September 2007 finally inject £10bn into the markets. An uneasy period followed of major banks and investment houses unveiling staggering losses, almost a contest to declare as much as possible before the public patience dried up.  Swiss bank UBS, Citigroup, Merrill Lynch all joined the group exposed and all blamed sub-prime related investments. In December five leading central banks from around the world offer billions of dollars in loans to banks, pumping money into the system but who benefits and where is it going- Banks remain shy over lending to each other.

2008 heralds a fresh start and new beginning, who are we kidding the problem still remains for the foreseeable future as Insurers who guarantee to repay the loans if the issuer goes bust feel the heat. Rating agency Standard and Poors downgrade its investment rating of those insuring bonds thus hitting the banks liquidity further. Up to now it is the richest nations who seem to be suffering the most as the reliance on living on credit hits home. Kenyans remain on the sideline, watching, waiting embroiled in their own political problems at home, not caring about the past indulgences of the West. Talk of recession as Global stock markets, including Londons FTSE 100 index, suffer their biggest falls since 11 September 2001. Losses to the US sub-prime continue to mount as a major bond insurer MBIA announces $2.3bn losses to bad debt. Rates continue to be cut all over the World. 17^th February decision on Northern Rock future becomes known, nationalisation favoured over Virgin group bail-out plan. A month later Wall Streets fifth-largest bank, bear Stearns, acquired by JP Morgan Chase for $240m, considered at the time to be a real bargain as a year earlier, Bear Stearns had been worth £18bn.  

In March 2008 UK housing Market stagnant as Nationwide predicts UK house prices will fall by the end of the year. Mortgage lending had become such a competitive industry with tens of thousands of products on the market. The 100% Mortgage is consigned to history as a staggering 20% of products withdrawn in just seven days. There are no similarities with the Kenyan financial sector as very few institutions offer Mortgages in such depth of choice and risk, with those in the Market hedging on prudent lending with their existing client base. Kenyans can shop around but their credit history is harder to transfer as a more secretive financial environment exists today in Kenya. Long term relationships with the financial institutions favoured over the supermarket style western rate and credit transfer race. The word race is often used as low offer rates usually only last 6 months forcing the client to look again. The full scale of the credit crisis was beginning to unravel as the International Monetary Fund (IMF) on the 8^th April, warns $1 Trillion could be lost from the credit crunch as other sectors assets become exposed, such as commercial property, consumer credit, and company debt.

Risky mortgage debts being secure by government bonds left a bad taste in many peoples mouth as the question of who to help next and why not just let them fall become the topic of nearly every conversation. Royal Bank of Scotland announces largest write-off yet for a British bank. Towards the end of April the UK housing indexes record first annual fall in house prices for 12 years by Nationwide. Prices were 1% lower in April compared to a year earlier, a figures confirmed by the biggest lender Halifax in the UK, days later.

 Barclays plans £4.5bn share issue to bolster its balance sheet as the FTSE 100 stock index briefly dips into a bear market, in which the market suffers a 20% fall from its recent highs. At the same time Kenyan markets falling at alarming rate as investor look for safe places to keep their money. Property market remains very strong in Kenya as all the factors explained above have no real similarities here at home. The banks have lent in a responsible manner and many Kenyans choose to buy a plot and build slowly over time. In the West large developers build huge estates and your home looks and feels like every other around you. Here in Kenya developers are following that trend but only recently, say in the last 5 years or so. In the beginning the houses and apartments they developed were immediately bought up even sold of plans. The Kenyan copy cat approach to business kicked in and the market is now saturated with high class Apartment blocks and squashed town houses in affluent parts of Nairobi and Mombasa. But it is still not experiencing a fall in prices, more of a slowdown of activity as a watch and wait policy consumes the sector.

More US bailouts in July 2008 as financial authorities step in to assist Americas two largest lenders, Fannie Mae and Freddie Mac. As owners or guarantors of $5 trillion worth of home loans, they are crucial to the US housing market and authorities agree they could not be allowed to fail. The previous week, there had been a panic amongst investors that they might collapse, causing their share prices to plummet. The realisation set into many minds that for now the stock markets were too unpredictable and heavy losses could still be around the corner. Talk of where the bottom end might be and speculation continues to dampen investment. Just 8% of HBOS investors agree to take up the new shares offered in its £4bn rights issue, because they are priced higher than existing shares are trading on the stock market. But HBOS still gets the £4bn it wanted, as the unsold new shares are bought by the issues underwriters.

More bad news as Nationwide reveals that UK house prices have fallen by 10.5% in a year. August 2008 sees a raft of negative news from around the world as the FTSE notch up its steepest weekly decline since July 2002. The US labour market figures, which showed the unemployment rate rising to 6.1%, were a further jolt to investors who have had to swallow a slew of poor economic data in recent days. But September things go from bad to worse, especially in the US where on 7^th September Mortgage lenders Fannie Mae and Freddie Mac - which account for nearly half of the outstanding mortgages in the US - are rescued by the US government in one of the largest bailouts in US history. Wall Street bank Lehman Brothers posts a loss of $3.9bn for the three months to August and searches for a buyer, before filing for Chapter 11 bankruptcy protection, becoming the first major bank to collapse since the start of the credit crisis. The US Federal Reserve announces an $85bn rescue package for AIG, the countrys biggest insurance company, to save it from bankruptcy. AIG gets the loan in return for an 80% stake in the firm. In a frenzy of takeovers and mergers Lloyds TSB announces it is to take over Britains biggest mortgage lender HBOS in a £12bn deal creating a banking giant holding close to one-third of the UKs savings and mortgage market. The deal follows a run on HBOS shares. In the largest bank failure yet in the United States, Washington Mutual, the giant mortgage lender, which assets had valued at $307bn, is closed down by regulators and sold to JPMorgan Chase. The credit crunch hits Europes banking sector as the European banking and insurance giant Fortis is partly nationalised to ensure its survival.

Nationalisation is back in the headlines as Congress allows the Treasury to spend up to $700bn buying bad debts from ailing banks. In Britain, the mortgage lender Bradford & Bingley is nationalised. The British government takes control of the banks £50bn mortgages and loans, while its savings operations and branches are sold to Spains Santander. The Icelandic government takes control of the countrys third-largest bank, Glitnir, after the company faces short-term funding problems. Wachovia, the fourth-largest US bank, is bought by its larger rival Citigroup in a rescue deal backed by the US authorities. Under the deal, Citigroup will absorb up to $42bn of Wachovia losses. Dexia becomes the latest European bank to be bailed out as the deepening credit crisis continues to shake the banking sector. After all-night talks, the Belgian, French and Luxembourg governments say they will put in 6.4bn euros ($9bn- £5bn) to keep it afloat.

October 2008 see a global fight back never witnessed for several generations. It is all about pumping money into the global markets and not letting any other financial houses fall. The underlying fear is that the whole financial system could crumble and fall if intervention does not happen quickly.  The US House of Representatives passes a $700bn (£394bn) government plan to rescue the US financial sector. Germany announces a 50bn euro ($68bn- £38.7bn) plan to save one of the countrys biggest banks . The UK government announces details of a rescue package for the banking system worth at least £50bn ($88bn). The US Federal Reserve, European Central Bank (ECB), Bank of England, and the central banks of Canada, Sweden and Switzerland make emergency interest rate cuts of half a percentage point. The Fed cuts its base lending rate to 1.5%, the ECB to 3.75%, and the Bank of England to 4.5%. Finance ministers from leading industrialised nations pledge action to tackle the financial crisis. The G7 nations issue a five-point plan of decisive action to unfreeze credit markets, after a meeting in Washington. The UK government announces plans to pump billions of pounds of taxpayers money into three UK banks in one of the UKs biggest nationalisations. Royal Bank of Scotland (RBS), Lloyds TSB and HBOS will have a total of £37bn injected into them. The US government unveils a $250bn (£143bn) plan to purchase stakes in a wide variety of banks in an effort to restore confidence in the sector. The fight back continues into November 2008 as the International Monetary Fund (IMF) approves a $16.4bn loan to Ukraine to bolster its economy, shaken by global financial turmoil. China sets out a two-year $586bn economic stimulus package to help boost the economy by investing in infrastructure and social projects, and by cutting corporate taxes. Countries are starting to look inward for the answers and US decided to concentrate on improving the flow of credit for the US consumer.  Further promises of injection of cash to stimulate banks to lend, just helps prop them up rather than lend. As US and the globe officially enter into Recession job loss announcement become the normal topic of conversation as carmakers feel the heat. President George W Bush says the US government will use up to $17.4bn of the $700bn meant for the banking sector to help the Big Three US carmakers, General Motors, Ford and Chrysler.

A new start for us all as US President-elect Barack Obama describes Americas economy as very sick and that the situation worsening. Hope that quick policy changes and common sense can drive US efforts to aid an economic recovery.  But US official figures show jobless rate rose to 7.2% in December, the highest in 16 years. The figures also indicate that more US workers lost jobs in 2008 than in any year since World War II. Chinas exports register their biggest decline in a decade. The Irish government says it is to nationalise the Anglo Irish Bank after deciding pumping money into the lender was not enough to secure its future. As the money Governments pledge increases the realisation that generations to come will pay in taxes for the greed and wastefulness of this spending generation. Clever people have made millions of dollars dealing with all this uncertainty as large organisations are stripped of their worth and assets. President Obama pledges that his economic recovery package will be at the centrepiece of his administration. Mr Obama says that 80% of the spending will take place within 18 months. The concept of spend your way out of a recession is very worrying. At home in Kenya money has got tighter, a natural effect of what is going on abroad as less money is sent back to friends and families. A positive effect is skilled Kenyan brothers and sisters are finally returning home after long periods chasing the Western dream of wealth and happiness. The ironic part is deep down the Kenyan people having less compared to others but seem to smile and enjoy life all the more.  World economic growth is set to fall to just 0.5% this year, its lowest rate since World War II, warns the International Monetary Fund (IMF) but what will that mean for Kenya- The International Labour Organization said that as many as 51 million jobs worldwide could be lost this year because of the global economic crisis. Environmental factors due to the poor rains seem to be having a more immediate effect on Kenyan daily lives. Power shortages as dams water reach levels that facilitate shutdown of the systems also effect businesses. Crops failing, hunger and starvation means the Kenyan Government should look inward at Kenyans own problems. We are proud to be Kenyan and wish to contribute on the world stage but this economic crisis is not of are making. The so called developed World, US in particular just lived on credit too long and finally had to pay the price. PropertyLeo leaves you to make your own mind up on this matter but concludes the credit crunch is finally felt here in Kenya. We hope we have provoked discussion among your work colleagues and friends and feel free to express an opinion through the normal contact us channel. Remember that Real Estate is your home, not only an investment and contributes significantly to your life and well-being. The fact that the Kenyan Real Estate sector has not crash does not mean it wont, however it could just as easily continue to rise, but more likely will remain flat with fewer transactions. Visit www.propertyleo.com for many more thought provoking articles.

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