The episode with Bear Sterns highlights a fairly serious situation for UK business, but this and the recent issues with Northern Rock are symptoms rather than causes of a problem. In effect, what we are seeing is a de-leveraging in the financial system, the impact of which is significant for business as it adversely affects risk premiums.

Over the past year we have seen risk premiums widen considerably on UK bank debt, raising the banks’ financing costs, while corporate risk premiums have followed suit. This suggests that the current weakness in the financial system may be driving up the cost of capital for UK corporations.

We are going through the credit crunch period of a financial cycle, which is something we haven’t seen in a long time. I’d say we are at the “witching hour” on the credit clock, which is the point in time when bubbles burst and weak players exit the market. It appears that two of the bad performers, Northern Rock and Bear Stearns, have suffered here. The question is how many more bad performers there are, but only time will tell.

Obviously, hindsight is a wonderful thing and it is difficult to say whether this situation could have been avoided, but it appears that the authorities in the US and the UK are doing everything they can to minimise the current de-leveraging.