Last edited 19 Feb 2021

Credit crunch

A credit crunch (or credit squeeze or credit crisis) is an economic state characterised mainly by a sharp drop in confidence and a lack of credit (or loans). At such times, usually brought on by a shortage of funds, financial organisations are less willing to lend money which can lead to a rapid economic slowdown. At any official rate of interest, credit becomes less available than it was previously.

Credit crunches frequently occur at the tail end of a recession and can also follow periods in which lenders are overly keen, even careless, when estimating customers’ creditworthiness. When such bad debts cannot be paid, losses are suffered by lending institutions and investors. Typically, such times will see lenders and investors retreating to less risky investments such as gold, silver and other precious metals.

The opposite of a credit crunch is ‘easy credit’ (or easy money or loose credit). These conditions usually involve easy-to-get, inexpensive loans that are a result of low interest rates for borrowers and relaxed lending policies by banks.

The term 'credit crunch' in the UK has become synonymous with the period following the 2007 financial crisis which followed a collapse in the sub-prime lending marked in the USA. A number of financial institutions had to be bailed out by governments, and the resulting debt, loss of confidence and withdrawal of credit dragged economies worldwide into recession.

The construction industry was particularly badly affected as finance became unavailable, investment was canceled and projects stalled.

Private output.jpg
Private sector housing and non-housing. Output/quarter (£millions 2005 prices) in Great Britain

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