The United States’ Federal Reserve has just cut base rates by a whopping 75 basis points or 0.75 percent, indicating that it regards recession as more likely than not.

Recession now seems inevitable

Syntagma has an in-depth analysis of the upcoming recession. Here’s a taster :

As we’ve been saying here in Syntagma for some months, a long, deep worldwide recession now looks more likely than not. Opinions are hardening among key players, principally in America and Britain.

Yesterday, the Wall Street Journal proclaimed : “U.S. warning signs point toward deep recession”.

Now even the insurance companies, or Monolines, that underwrite possible defaults, are also in trouble, with two of the biggest in the U.S. said to be close to Chapter 11 status (a form of bankruptcy protection against creditors).

Clearly, with the Fed in near panic mode something nasty is moving in the undergrowth.

Is a worldwide recession already underway?

The Chief Economist of U.S invesment bank Merrill Lynch believes so. According to his analysis America is now into the first month of a recession, defined as two successive months of negative growth.

Other commentators think it could be longer than that, while some, like Irwin Steltzer, speaking on the BBC’s Newsnight, believes sovereign wealth funds will allow the banks to re-establish their balance sheets and avoid a banking crisis.

For an analysis of the coming recession on both sides of the Atlantic see John Evans’s article in Syntagma.

He writes, “All banks are now hoarding cash like Ebeneezer Scrooge on a bad day and virtually ceasing to lend. With house price indices slithering down a slope like novice ice skaters, and inter-bank rates running at around 8 percent, this has become a total banking crisis worldwide, and that has the potential for real evil in our economies.”

Read the article here.

We will shortly publish an updated piece on how to avoid the worst effects of a recession in your personal finances.

The long-expected credit crunch linked to massive failure in the American sub-prime market really hit home yesterday.

The European Central Bank, regulator of the Eurozone group of countries, piled into the markets with $130 billion of cheap, emergency credit.

The move, the biggest central bank intervention since 9/11, came after reports that commercial lenders were desperately hauling back the supply of loans. The French giant BNP Paribas suspended withdrawals from three of its investment funds because of their exposure to the U.S. sub-prime market, saying “There has been a complete evaporation of liquidity” from credit markets, which could escalate into a worldwide credit squeeze.

Rumours were rife of impending fund meltdowns and banking collapses. Trevor Williams of Lloyds TSB said, “Liquidity has dried up basically. It’s a moment of panic.”

Nick Sparks, risk manager at F&C Partners, said, “People have got caught out. There will be more pain to come.”

You have been warned.

In the UK, buy-to-let property has been a top target for many investors, big and small. Many people are entering the thriving market as a substitute for pensions.

Now, it seems, the prospects are not so good, as interest rates rise, putting pressure on borrowers, and house prices start to fall. Worse, landlords will be hit harder than the lenders in the prevailing conditions.

Indicative of this, the share price of Paragon, Britain’s biggest buy-to-let lender, has fallen 20 percent this year. This is despite the firm being the most conservative mortgage lender in the sector. Only 0.15 percent of its lending book is in arrears, compared with 0.64 percent across the buy-to-let market, and 0.89 percent in the mortgage sector as a whole.

The company asserts, however, that landlords generate 125 percent of their mortage costs, giving Paragon some protection from a downturn. Similarly, it makes 90 percent of its money from its backbook, so plummeting mortgage applications won’t hit it very hard.

Paragon shares might just be a good buy, despite the state of the market. Whether landlords with their pensions tied up in property will see it that way, remains to be seen. Play it long, is good advice here.