How Bad Loans in US Can Have a Far Reach (2/2)

In early August, the French bank BNP Paribas had to temporarily bar investors from withdrawing money from 3 investment funds. Their value dropped by 20% in less than 2 weeks. The bank blamed difficulties in valuing its holdings in the subprime market.

Worries over subprime loans have hurt even some of the biggest lenders in the United States. On August 16th, the nation's biggest housing lender, Countrywide Financial, had to turn to banks to finance its short-term debt. Normally the company would raise the money in financial markets.Many took this as a sign that investors were becoming unwilling to provide short-term loans to companies. Especially companies involved with subprime loans.

A shrinking debt market, a credit crunch, can affect stock markets. Not only have subprime losses hurt financial stocks. Many companies depend on credit. Private equity groups often use borrowed money to finance buyouts of publicly traded companies. Hedge funds also use borrowed money for their investment activities.

In an effort to calm financial markets, the Federal Reserve 2 weeks ago cut the rate it charges banks to borrow money. Many investors hope the central bank will cut its main short-term interest rate when policymakers meet on September 18th.