What is toxic debt?

Link to the full news article: Channel 4

Last Modified: 27 Feb 2009
By: Channel 4 News

And why is it such a problem for the UK economy. Channel 4 News online explains all.
Q: What is toxic debt?

A: Like the expression credit crunch, toxic debt is a new phrase born of the economic downturn.

It is used to describe a class of assets that once had value - or were perceived to hold value by banks - but are now worthless; or at least have a reduced value which is hard to establish.

To give an example, it is useful to look at the area from which many economists believe the term toxic debt came from - home loans in the United States to people who could not really afford to pay them back.

The banks hoped these loans, assets, would be secured against the value of the homes, even if people defaulted on their payments.

But once large numbers of people started to default, and a glut of property came onto the market, suddenly the value of houses plummeted. Thus, the assets became toxic.