There may be trouble ahead

It's the countdown to Christmas, with everyone out to spend a few quid and enjoy themselves. But trouble in the financial world makes Business Correspondent RICHARD BAKER wonder whether it's going to be a Happy New Year

Right now everyone's talking shops. It's the run up to Christmas and we're all wondering whether that last minute rush means it'll still be a retail record.

May be it will, may be it won't. The John Lewis's of this world are clearly having a stormer, the Victoria Centre store taking more than a million last weekend alone.

But my information is that some of the smaller stores are having a very hard time indeed, with takings down by two-thirds in some cases.

Still, it's all good fun for the shopper who likes a cheap deal. I wonder what's going to happen when the credit card bills land in January, though.

Why? Well, there is another issue ticking away in the background that tells me the Christmas cheer could drain away pretty quickly for a lot of people.

I'll sound a warning at this point: this blog is about to wander into the world of international finance, which on the face of it isn't something most of us talk about over our cornflakes.

But there are sound reasons why you should be bothered this time round. So please stay with me.

Some of you may have seen stories about the Bank of England and its counterparts in the USA and other parts of the world taking concerted action to try to cure what's become known as the international credit crunch.

The credit crunch means banks have been reluctant to lend money to each other, causing problems in a crucial part of the international banking system.

Let's recap. The crunch started in the summer, when it became apparent that banks were about to lose a fortune on an entire area of the US mortgage market where they had been lending money to people with bad credit histories.

So the international money markets dried up, as banks decided they would be better off hanging on to what money they'd got while we waited to find out how big these losses were.

But this crunch has now dragged on so long that the Bank of England and its colleagues decided they would have to get things moving by pumping tens of billions into the market.

Problem solved? Unfortunately not.

Money may now be available to oil the wheels of the banking industry, but what is still worrying a lot of people is the losses that started this crisis off.

Banks doled out cheap homeloans in the USA because they probably figured that even if those people with poor credit histories failed to pay, rising house prices meant they could simply repossess the house and get more than their money back.

They also did it because the security these rising house prices gave meant other financial speculators were willing to buy those loans off them

Not anymore. House prices are now falling, so banks can't sell the debt and won't get the fees and interest they thought they would. Instead, they are stuck with property on their books which is worth LESS than the money they loaned out.

Worse still, property prices are still falling. Which means banks and other financial institutions may be sitting on apparently bottomless losses. These losses already run into billions and billions.

Now, while this probably sounds slightly worrying it may also seem distant - a problem for the banks, not you.

Banks refusing to loan each other money in a credit crunch is bad enough. But a bank losing its shirt is altogether more frightening. Not even Northern Rock was in that territory (though it seems to be getting to that stage).

Before you start to panic, we are not at that stage either, and there is no need to take your money out of the bank and stuff it under the mattress.

But we are at a stage where the world's major central banks have taken the unprecedented step of working together to pump tens of billions into the money markets.

And probably at a stage too where the Governments in those countries are now beginning to wonder whether they may have to step in to stop a problem in the financial system spreading into everyday life.

The implications of the public sector having to bail out a private sector that appears to have overdone things in a big way is a subject for another day.

But this is what Governments will probably do to avoid banks themselves ending up short of money and unable to function.

And this is why something that might seem distant is in fact closer than you think.

Banks are now likely to take a more sceptical approach to lending money for all sorts of things, whether it's a simple loan or (especially) a mortgage.

They are also going to get a lot tougher on people who fail to pay. Repossessions and business failures are almost certain to go up.

This doesn't sound like much of a Happy New Year. But it may be what's necessary to stop it turning into an awful one.