Mortgage credit restricted by Eurozone

An indicative measure of the cost to mortgage lenders of raising funds in the wholesale market, combining both three month LIBOR with the five year credit default swap premia of major banks, indicate that the cost of wholesale funds has spiked upwards by around 200 basis points since June.

The rise reflected the market’s concern about the exposure of UK lenders to the escalating sovereign debt crisis in the eurozone.

This has triggered a sharp increase in the cost of insuring against default by major UK banks – a cost that lenders have to bear when they go to the wholesale market for funding, said the report.

Last week’s Credit Conditions Survey from the Bank of England showed that the deteriorating outlook had already led lenders to tighten credit scoring criteria.

The report said: “The latest rise in financing costs will do nothing to enhance lenders’ willingness or ability to lend. Overall, then, all of this means that the supply of credit over the next year or so is likely to remain restricted and could potentially become more expensive.”