Warnings of new global credit crunch threat
Consumers are encouraged to continue saving as the IMF warns of a second credit crunch worldwide, as Europeans banks cut their balance sheets.
In the face of the euro crisis, banks have slashed their balance sheets and as a result the International Monetary Fund (IMF) has highlighted the possibility of a second credit crunch.
According to the Washington-based organisation, the world’s largest banks are expected to reduce their size by £1.6 trillion by the end of next year.
This means businesses in Britain and throughout Europe may be less likely to borrow large amounts from banks- highlighting the importance of saving and reducing costs.
In the final quarter of last year, banks reduced their balance sheets by 0bn, showing the squeeze is already underway.
The IMF said: "there is a risk that a large-scale reduction in assets by European banks could lead to a credit crunch" of the kind seen in the early stages of the credit crisis in 2008/09.
This warning could cause concern in the UK to small and medium sized businesses that are still struggling to raise capital.
The IMF said euro area nations such as Spain and Italy would be most affected, but Britain could suffer a near 1% fall in bank credit.
It said: "Small and medium-sized enterprises (SMEs) are likely to be most affected.
"Even where credit is maintained, corporate borrowers could face elevated borrowing costs."
Jose Vinals, IMF financial stability chief, said: "So far current policies have prevented a generalized 'credit crunch', but we still anticipate a considerable squeeze on credit which will impede growth."
The European Central Bank’s emergency LTRO lending scheme previously helped settle euro financial markets.
There are a number of ways consumers can reduce their debts and manage their finances. Savings in bank accounts is one way to ensure there are necessary funds in place when in need of extra cash.