Debt Consolidation and the Financial Markets

Lehman Brothers, bailouts, government rescue packages – the financial news in America might not seem important to UK citizens in debt, but the state of US markets is sure to affect the availability and price of debt consolidation loans in Britain.

“There is definitely a connection between what’s going on in the US and what goes on in the UK,” said Graham Beale, Nationwide Building Society chief executive, “and it really comes down to market confidence, and we are talking about global market confidence because clearly, with the massive disruption in the US, banks have stopped lending to one another. And we need that fluidity back in the market.”

Normally, the debts which institutions own (i.e. the money which people owe them) count as assets. Each Pound / Dollar of debt is basically seen as being worth a number of pence / cents, depending on how likely that debt is to be repaid. Today, however, no-one knows how much a lot of that debt is worth, so companies can’t sell it. They also can’t use it as collateral – and that makes it hard to borrow money from other companies.

This is one reason it’s difficult for banks and other financial institutions to provide credit, whether it’s a mortgage or a debt consolidation loan, to individuals. For people in debt, this is bad news. Debt consolidation isn’t the only debt solution, but it’s one which could help many borrowers get their finances in order once more.

So the authorities are trying to resolve the situation. In the US, there’s the proposed $700 billion ‘bailout’. In the UK, there’s the Bank of England’s (BoE’s) Special Liquidity Scheme.

Quoted on CNN, Treasury Secretary Henry Paulson said the $700 billion bailout was necessary “in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of businesses both small and large, and the very health of our economy”.

As for the BoE Special Liquidity Scheme, the BoE website says: ‘Under the Scheme, banks can, for a period, swap illiquid assets of sufficiently high quality for Treasury Bills. Responsibility for losses on their loans, however, stays with the banks. By tackling decisively the overhang of assets in this way, the Scheme aims to improve the liquidity position of the banking system and increase confidence in financial markets’.

The details are very different, but the basic idea is the same – to remove some of the debt which banks and other financial institutions are carrying, ‘unfreezing’ the financial markets and allowing consumers greater access to the credit they need for everything from buying a house to consolidating their debts.