Sunday, November 2, 2008

Words of the week 3 - 9 November: CREDIT CRUNCH, SUBPRIME, STAGFLATION

credit crunch
A situation in which loans are being less easily available or very expensive, which slows down economic activity.

The term credit crunch has been in the news a lot in recent months as a result of the problems in the US sub-prime mortgage sector which specializes in lending money to people on low incomes. Many of these people have been unable to keep up repayments on the money that they have borrowed and the banks have had to write off the loans as a bad debt (= accept that the money will not be paid). As a consequence, the banks have lost a great deal of money and are now less willing to lend money.

The adjective subprime describes a risky loan, mortgage or other investment. Subprime lending is the practice of giving loans at higher interest rates to borrowers with a poor credit history. It is therefore a risky enterprise for both borrowers and lenders – borrowers pay more, lenders potentially lose money to clients with dubious financial circumstances who can’t always afford the loan in the first place. In the United States, borrowers are often classified as subprime (i.e.‘risky’) or prime (i.e. ‘best, without risk’) based on their respective credit scores.

Stagflation is a blend of two words (portmanteau) used broadly to mean an economic situation in which inflation and economic stagnation occur simultaneously.

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