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What caused the growth in toxic assets in the UK?

As the UK government looks to further strengthen the financial sector with a £500 billion insurance package against toxic assets many people are starting to wonder how these assets have appeared and the possible consequences for the UK banking sector. The situation has been in the background was some time but only recently has been identified as a potentially serious situation for not only the financial sector but the UK economy as a whole.

In simple terms, toxic assets are financial agreements which either have or have the potential to go seriously wrong leaving the banks in question with significant losses. The collapse of the UK economy has left the property sector exposed with substantial falls in not only property values but rental income placing more and more companies under serious financial pressure. Their inability to pay the remainder of their debts, and in many cases keep pace with agreed payment programs, has left a substantial gap between outstanding debts and the value of assets assigned to these agreements.

In effect, many UK banks will not be able to sell properties at a "reasonable" price in order to pay off the vast majority of loans outstanding. The situation is something of a self-fulfilling prophecy because as more and more properly is sold on the open market at distressed prices this then drags down the overall market.

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