5 Signs of a Credit Crisis

The recent global financial crisis left so many important lessons to consumers all around the world. For one, we have realised that every economy is not independent of each other. What happens in the US, for instance, may create a domino effect and have impacts that may reach other markets, including that of Australia.

Times are really hard. These days, the compound word ‘credit crunch’ has become a household term. Everyone seems to be paranoid of it. For sure, you would want to be more cautious and frugal whenever there is a looming credit crunch. Today, it has reached the popularity of the so-called end-of-days or apocalypse claims.

As a mindful and intelligent consumer, you could always tell when a credit crunch is looming. Here are five common signs of a credit crisis. You may check these out before reacting unnecessarily to any false claim or prophecy.

Government-issued treasury bills decline. This is because investors become wary and pull out their investments from the government. Usually, this is also taken as a sign of lack of confidence in the economy. Investors would then find other investment venues or products where they could put their money. Unfortunately, those investments may be in other countries. The government may possibly end up short of cash if that happens.

Inter-bank interest rates rise. This may indicate distrust among local lenders. Through higher rates, banks tell each other to back off as they lack trust that fellow lenders would be able to meet financial obligations. Logically, this would translate to higher interest rates imposed to consumers, tighter lending standards, and refusal of banks to take further risks, which may lead to lowered lending transactions, a total no-no to consumers.

More commercial papers are issued. When this happens, it is clear that the credit market is tighter. This is because businesses opt for such higher-rate facilities as lending from banks become stricter, if not impossible.

High-yield bonds proliferate. There are scarce or very few borrowing facilities or opportunities provided to businesses. In turn, businesses tend to issue such bonds instead (regardless of rates) so they can obtain financing or capital they need to fund their daily and important operations. Again, this happens only when the credit market is tighter and a credit crisis is looming.

Stock prices fall. Stocks tend to be the most volatile and easily influenced investment products in the market. Investors and shareholders easily react to market and economic news. When there is a looming credit crisis, experts warn about the bearish market coming. This would translate to falling stock prices, which in turn would mean shares of stocks would decline in value.

Are you anxious about a possible credit crisis? It is no time to panic if one is expected to come. As we have realised from the past economic crises, markets and economies would always bounce back. There is truth to the simple principle that anything that went down has nowhere else to go to but up.

Andrew Black has been working in the finance industry for over 2 years, offering advise and assistance on credit card debt. Andrew has a good knowledge of the industry and is a keen blogger.