The current economic crisis has created considerable confusion due to terminology from the business pages spilling into the front pages.
Financial jargon which was exclusively used on the business floor is now being widely mentioned in conversations between individuals.
Here is a guide to business, economic and financial terms which crop up regularly.
Policies initiated to reduce government borrowing, debt and deficit by increasing government revenues, cutting back on welfare programmes or introducing tax rises.
The financial support a struggling borrower can get through either obtaining loans which markets no longer lend to guaranteeing a borrower’s debt. Usually the institution which provides the loans also guarantee the value of a borrower’s risky assets and provide help to absorb potential losses, such as in a bank recapitalisation.
A legal process where the borrower cannot repay its debts – which can be an individual, a company or a bank. In order to claim back what is owed by the borrower, their assets are valued, and possibly sold off [liquidated], in order to repay debts.
If a borrower has insufficient assets to repay its debts, the debts could be written off, which means the lenders have to accept that some of their loans will never be repaid, and the borrower is freed of its debts.
Bankruptcy varies greatly from one country to another, some countries have laws that are very friendly to borrowers, while others are much more friendly to lenders.
A security on a debt of a borrower which states that a loan must be repaid and what interest the borrower must pay to the holder. Bonds are issued by companies, banks or governments to raise money which are then bought by banks and investor to buy and trade.
For investors, it refers to their stock of wealth, which can be put to work in order to earn income. For companies, it typically refers to sources of financing such as newly issued shares.
The moment of of panic selling which creates a collapse of the markets and the financial system.
When there are fears about the possibility of borrowers to repay their loans, banks and other lenders cut back their lending at the same time.
If heavily indebted borrowers are cut off from new lending, they may find it impossible to repay existing debts. Reduced lending also slows down economic growth, which also makes it harder for all businesses to repay their debts.
Ratings agencies give assessments to a borrowers debt according to their safety based on their creditworthiness, in other words if they can pay back loans and sustain their debt.
Ratings range from AAA, the safest, down to D, a company that has already defaulted their loans. Ratings of BBB- or higher are considered as “investment grade”. Below that level, they are known as junk.
A borrower can sometimes renegotiate the terms of its debt they owe. Sometimes it can mean a reduction of interest or even an increase in the time it has to repay the loans. Sometimes a debt restructure can avoid a default in the loan even though the restructuring can result in an obvious loss to lenders. In some cases a debt restructure can be termed as a default in the short-term for the borrower, but in the long-term the debt is still being paid off, rather than a total default.
A default is when the borrower fails to pay off a debt on time by missing a payment which then means a bankruptcy or a debt restructure for the borrower.
Sometimes if a borrower defaults one payment to one lenders, then all of its lenders may be able to demand that theborrower immediately repay them all.
When the prices of goods and services across the whole economy are falling, the economy then enters negative inflation, which is known as deflation.
An income payment by a company to its shareholders, usually linked to its profits.
An economy which is in recession that has a small recovery mainly under one per cent but dips back into recession.
The value of a business or investment after subtracting any debts owed by it, if the amount is not worth minus the amount of debt that is outstanding on it, then it is known as negative equity.
The current eurozone crisis answer is the idea of issuing eurobonds which is an idea of a common, jointly guaranteed bond of the eurozone governments. Germany refuses to introduce eurobonds as it means the German banks will hold debt of countries like Greece, Spain or Italy.
|European Financial Stability Facility (EFSF)|
The EFSF was set up by eurozone states in 2010 to provide loans to countries in financial difficulties and recapitalise financial institutions via loans to governments. It is backed by guarantee commitments for a total €780 billion and has a lending capacity of €440 billion, and issues bonds on the capital markets.
|European Stability Mechanism (ESM)|
The ESM, agreed to by eurozone finance ministers last July, is due to replace the EFSF by July 2013 and will provide a permanent rescue fund for eurozone and non-eurozone EU countries. But the treaty creating it needs to be ratified by all eurozone member states before the end of 2012.
The entire policy of any government’s borrowing, spending and taxation decisions is known as a fiscal policy. If a government is afraid that the economy is going into recession, it can engage in fiscal stimulus, which can include cutting taxes, raising spending and/or raising borrowing. But if a government is worried it is borrowing too much, then it can engage in austerity measures, which means increasing taxes and cutting spending.
Gross domestic product is when economy activity is measured though economic output of goods and services, income and expenditure of the entire economy.
The upward price movement of goods and services.
The policies of the central bank of any country. A central bank has the power to create new money which allows it to control the short-term interest rate, as well as to engage in unorthodox policies such as quantitative easing – printing money to buy up government debts and other assets. Monetary policy can be used to control inflation and to support economic growth.
When the the value of a house or any other asset is less than the amount of the debt that still has to be paid off.
Central banks increase the supply of money by “printing” more money, which can be used to buy government bonds.
Central banks do not physically print more notes, but the new money is typically issued in the form of a deposit at the central bank.
Quantitative easing adds more money into the system, which depresses the value of the currency, and to push up the value of the assets being bought and to lower longer-term interest rates, which encourages more borrowing and investment. Some economists fear that quantitative easing can lead to very high inflation in the long term.
A period where there is negative growth in the economy. In most parts of the world a recession is technically defined as two consecutive quarters of negative growth.
When an economy that is not growing while prices continue to rise which increase the cost of living.
Monetary policy or fiscal policy aimed at encouraging higher growth and/or inflation to help the economy grow.
Debts that are unlikely to be recovered from borrowers.
The return to an investor from buying a bond in it’s current market price. It also indicates the current cost of borrowing in the market for the bond issuer. As a bond’s market price falls, its yield goes up, and vice versa. Yields can increase for a number of reasons. Yields for all bonds in a particular currency will rise if markets think that the central bank in that currency will raise short-term interest rates due to stronger growth or higher inflation. Yields for a particular borrower’s bonds will rise if markets think there is a greater risk that the borrower will default.
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