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Start of the subprime crisis

In August 2007, payment defaults by borrowers in the United States led to the subprime crisis, involving variable-rate mortgages granted to lower-income Americans (as opposed to prime credits, granted to better-off borrowers). Between 2000 and 2007, subprime loans rose from 9% to 20% of total outstanding US loans. The progressive increases in the Fed's key rates implemented from 2004 onwards in a climate of sustained growth meant that many US households were unable to repay their borrowings when due, at just the same time that the rise in real estate market prices was coming to an end.

Losses on subprime loans weakened financial institutions' balance sheets. In September 2008, in particular, Lehman Brothers bank ran into serious difficulty and was not supported by the US government, forcing it into bankruptcy. The financial markets were immediately affected with the 30 largest US capitalisations losing 50% of their value compared with September 2007.

In this context, an atmosphere of mutual distrust developed between banks, with each refusing to lend short-term on the interbank market as they feared their counterparts could already be too weak to meet the repayments. The shortage of credit then led to the economic crisis.

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