Credit Crunch

1.0 INTRODUCTION

In today's world of global financial markets, the significance of credit availability to sustaining real economic growth is much debated. Since 2007, the UK, and in general, the rest of the world, has been in the hold of a credit crunch and its great impacts has been felt in all sectors and all markets.

According to Root (1994), a Multi National Enterprise (MNE) is a parent company that engages in foreign production through its affiliates, located in several subsidiaries. It exercises direct control over the policies of its affiliates and implements business strategies in production, marketing, finance and staffing that transcend national boundaries (geocentric).

This report has been written for the purpose of examining how the credit crunch has impacted on the operations at the MNE Tesco PLC with a focus on the food retailing industry and the responses it has made and will make in the future to combat the impacts of the credit crunch.

2.0 WHAT IS A CREDIT CRUNCH?

A credit crunch, also known as a credit squeeze or credit crisis, is defined by Bernanke and Lown (1991) as a decline in the supply of credit that is abnormally large for a given stage of the business cycle. Credit normally contracts during a recession, but an unusually large contraction could be seen as a credit crunch.

Similarly, Owens and Schreft (1992) defines a credit crunch as a period of sharply increased non price rationing and it can be seen as a reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. It generally involves a reduction in the availability of credit, independent of a rise in official interest rates.

In simple terms, it is a crisis caused by banks or lending institutions being too nervous to lend money to businesses and consumers, and if they do take the risk of lending, they will charge higher rates of interest to cover their risk. The consequence is a prolonged recession, or slower recovery, which occurs as a result of the shrinking credit supply.

A credit crunch is a period in the economy, distinct from a recession or depression, but potentially heralding one or the other. A lack of credit to banks, companies and individuals, brings with it the threat of recession, job losses, bankruptcies, repossessions and a rise in living costs.

3.0 THE DEVELOPMENT OF THE CREDIT CRUNCH

The term credit crunch was used in a study by America's Federal Reserve Bank as far back as 1967. However, according to Budworth (2010), it was once an arcane term only known to economists, but the phrase "credit crunch" has been so widely used over the past few years that it has been added to the latest edition of the Oxford English Dictionary.

Defined as "a severe