2007: The year of subprime and crunches

Looking back 2007 is set to be defined as the year of the crunch.

The overarching theme of the year has to be the story of how the US subprime crisis spilled out across the world threatening to suffocate economic growth in 2008.

Last year saw US homeowners in the subprime bracket – those with poor credit records or low incomes – starting to default on their loans as higher interest rates started to bite. By 2007 this problem hit far and wide.

Northern Rock

The biggest casualty in the UK was Northern Rock.

Around the world a period of low interest rates had led investors to look into new areas to boost their profits and the higher interest rates paid by subprimers seemed to offer the answer.

The loans were bundled together and sold on as asset backed securities and collateralised debt obligations (CDOs) – but when US homeowners defaulted theses investments' their value fell and the credit crunch of this August struck.

Banks were forced to admit billions of pounds worth of losses, but the danger was that no-one really knew who had invested in what – so none of the banks wanted to lend to each other and as a consequence the cost of loans rose.

It was this lack of funds that caused Northern Rock to call for Bank of England help and led thousands of savers onto the streets in September in an attempt to withdraw their cash – giving the much beleaguered mortgage lender a greater headache.

While Northern Rock was the only bank to be thoroughly rocked by the subprime disaster, losses were reported at all the world's biggest consumer and investment banks.

The Northern Rock saga continued to rubble on and will do it seems into 2008 – with no definite buyer yet in sight.

After the queues died down, thanks to chancellor Alistair Darling's guarantees, the future of the lender started to be settled.

With some calling for renationalisation – as the government was the largest creditor – private equity groups lined up and dropped out. Currently a consortium fronted by Sir Richard Branson's Virgin Group and the private equity group headed by the man who turn Abbey around lead the race.

At the bottom of the pile, the Rock's shareholders have seen the value of their investments dive bomb – from a high of 1,258p earlier in 2007 to a low of 60p - and the Virgin deal, if successful, would see them having to pay out further.

But the credit crunch story does not end their. It is now being blamed for a variety of ills that have plagued the UK's finances over 2007.

House prices

2007 saw property prices on a roller coaster ride. The year started off, well with house price growth managing to stay over ten per cent.

However, while the boom didn't turn to bust in the second half of the year, it did turn to slowdown – with zero per growth now widely predicted for 2007.

The credit crunch was laid to blame for some of the slowdown – with getting hold of a mortgage credit at a good rate becoming harder – but high levels of debt, consumers being hit by rising interest rates from the Bank of England and a slow wage growth also took effect.

Over 2007 the Bank of England increased rates in January, May and July until they reached 5.75 per cent – the highest level since February 2001 – as it tried to counter inflation and a, then, soaring property market.

In December rates were trimmed back 0.25 per cent – despite inflationary pressures – as fears of economic slowdown grew – itself stemming from the credit crunch as borrowing costs rose.

Stock market

The stock market also saw a roller coaster ride this year – again pulled and pushed along by the credit crunch and subprime losses.

The FTSE 100 rose steadily until July – with a dip in March – before falling sharply in August, rising jaggedly until October, then falling and rising again to the end of the year.

The other main story from the markets was the dollar's magnificent fall, which saw sterling reach record highs over $2 to the pound – again prompted by the slowing US economy and housing market woes on the other side of the Atlantic. In November the pound was worth $2.12.

Into 2008

2008 looks set to be a year dominated by debt. The Council of Mortgage Lenders (CML) warns repossessions could rise by 50 per cent next year – although this is still historically low. The UK's high debt levels could start to catch people out – with a post-Christmas financial hangover heralding a crisis for many.

Inflation is expected to rise further in early 2008, with higher oil and food prices leading the way – however, the Bank of England is counting on inflation falling later in the year, so interest rates can come down.

The coming year could well see two or three interest rate cuts – but they should not be enough to kick start a flagging property market until late 2008.

In banking, 2008 could be the year charges for current accounts become commonplace, as banks try to limit losses from the reduction of fees on overdrafts, bounced cheques and other areas.

Overall, 2008 is set to be a year of escaping the crunch and squeezing the most of from the best deals on the market to make your money and your finances go further.