Is The Debt Bubble About To Burst?
Commercial lending to tighten – Seen this before …
There is one thing that is certain in the economy and that is when liquidity tightens so does everything else. All we have to do is look at what has happened to the property market to see this. Lending parameters tightened in the buy to let sector and the knock on effect has been a decline in lending value and transaction figures which crucifies liquidity in the market. So what happens when the commercial lending remits tighten and business’s can no longer borrow cheap cash after relying on it for so long.
The UK national debt has increased to its highest ever figure at an estimated of £1.78 Trillion. This equates to around 87% of the total GDP in the market. Very close to being 100% for any ones liking. This is essentially assuming the underlying GDP is actually valued correctly as well. If we compare to Germany, they have already got back under their 2008 debt to GDP figure currently sitting at 64.10%. These figures show the excess level of leverage we have allowed or been forced to take out since the crash. A lot of the cheap borrowing has been used to fund liquidity, then been allowed to restructure for more favourable terms. Delaying the inevitable and keeping companies floating. In basic terms companies have been borrowing and borrowing and borrowing to fund cash flow, which has helped them push losses in to future years creating ‘Zombie’ companies. This then finally catches up with the company and shows a huge black hole in the figures (Patisserie Valerie springs to mind as the most recent perpetrator).
So when the banks pull the rug on the lending the knock on effect is quite clear to see. No way of funding liquidity, which leads to companies eventually running out of cash as the losses catch up with them. Once this happens, these companies will then have to go to the market to find large amounts of cash to stay afloat. Funny enough this cash also won’t be available because the rest of the markets liquidity has tightened up due to the borrowing restrictions. This then creates a huge domino effect across all the over valued non-profitable business’s that are now unable to access essential cash. Not only are they unable to access cash, any assets that are held within the company also then down valued due to the fact there is reduced lending in the market and Lending drives valuations, thus leading to a large amount of liquidations. To put things in perspective the countries GDP has reduced by around 10% since 2008, but the debt has grown by 344% which is clearly not sustainable for the foreseeable future. lets add a few extra things in to the mix such as Brexit and it could be a few interesting years for the UK. Any companies currently sitting with healthy balance sheets and large pots of cash will be able to take advantage of this impending liquidity issue in the coming years.
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