if credit market problems persist
Posted on 09/25/2007 4:40:40 AM PDT by TigerLikesRooster
|
|
|
|
if credit market problems persist |
Even when the financial waters are calm, the International Monetary Fund's Financial Stability Report can make for worrying reading. When markets are in the midst of a major crisis, it can be extremely disturbing.
The message from the latest of these risk assessments is that this crisis is no flash in the pan. The likelihood of further market crunches has increased significantly, it said. Even if these do not occur, there will still be major knock-on effects on the economy.
Jaime Caruana, chief author of the report, said: "After a long period of benign conditions, the financial system is enduring a significant test. This has important implications for the economy. We expect that the process of adjustment will be protracted and there will be implications in terms of the lessons that need to be drawn. There may be some regulatory changes which need to be examined."
He predicted a slowing of the global economy's growth, and said it could help to push up inflation, as markets realise that money is likely to be considerably more expensive in the future.
The report was even more foreboding, saying: "The consequences of this episode should not be underestimated and the adjustment process is likely to be protracted. Credit conditions may not normalise soon, and some of the practices that have developed in the structured credit markets will have to change."
The probability of major financial institutions defaulting has risen dramatically, as jittery investors withdraw money from the market.
With the crisis having originated in the US, all eyes are now on the American property market. The report warned that problems in the credit markets could push US property prices even lower, while the world economy will suffer if the high interest rates in credit markets persist.
"The chances of more severe tightening of credit conditions cannot be dismissed," it said. "Such a tightening could have significant global macro-economic consequences, with the incidence of such tightening falling most heavily on more marginally creditworthy borrowers." Meanwhile, the sub-prime crisis is likely to last "at least through 2008", with more families defaulting as the low introductory "teaser" rates rise, the report said. It added that even if house prices fall only 5pc and then stabilise, losses from the sub-prime defaults would still reach $170bn (£84bn), with a quarter of this lost by banks and the remainder by holders of mortgage-backed securities.
 |
In its latest update of its economic forecasts next month, the IMF is expected to slash its forecast for US economic growth next year – perhaps to as low as 1pc-1.5pc.
Although the crisis has mainly affected US and European markets so far, developing economies are also at risk. In some countries, banks have borrowed abroad in foreign currencies to lend domestically, and with little capital to rely on they are vulnerable to the problems in Western credit markets.
The assessment – given extra weight as the IMF is notoriously conservative with its forecasts – will be a major disappointment to many in the markets who expected a quick recovery.
The report said the crisis stemmed in part from three key weaknesses:
• Uncertainty and poor information about the risks associated with complex financial instruments. Greater transparency is needed.
• Globalisation has meant crises spread faster around the world since, for example, US mortgage debt is owned by investors from Germany and the UK to China and Australia.
• Investors have become over-reliant on ratings agencies which grade various debt instruments. It concluded the agencies should introduce a special ratings scheme for complex structured credit instruments – the products at the centre of the turmoil. It added that institutional investors "must ensure their investment mandates do not lead to an over-reliance on agency letter ratings, and that they do not (implicitly) delegate the job of examining complex assets to ratings agencies."
There was no way in hell I was going to use an ARM. I have a 15 year fixed rate that will be paid off in 10-12 years.
Me too.
Which Greenspan and many others fought tooth and nail. Many of them chanted the mantura, "The market will sort it out. No need to worry."
Globalisation has meant crises spread faster around the world since, for example, US mortgage debt is owned by investors from Germany and the UK to China and Australia.
Did they not know this? If they have just realized it, they are too incompetent to run the financial system. However, U.S. managed to outsource financial risks to other countries. At least in the recent subprime episode.
must ensure their investment mandates do not lead to an over-reliance on agency letter ratings
I thought that they were more than eager to do this because the alternative is the imminent severe market crisis.
“With the crisis having originated in the US, all eyes are now on the American property market.”
Are people in this country the only ones who took out these stupid loans? Somehow, I think not.
Ergo, a further lowering of interest rates 50-100 basis points today will solve those problems.
“...while the world economy will suffer if the high interest rates in credit markets persist.
Ergo, a further lowering of interest rates 50-100 basis points today will solve those problems.”
Except for the fact that we are the only ones lowering our rates and killing our currency.
My except from your article gave us what the IMF insists will head off this crisis—lower interest rates. Got to read between the lines.
Article:
The Book:
Yes and the moon MAY be made of green cheese!! Mars MAY be home to little green men and Bill MAY really have had sex with that woman - Miss Lewinsky, after all!!!
Or this MAY be more “much ado about nothing” to fill up vacant newspaper space!
Only in the sense that the article reports what have been obvious for some time. What it says is nothing new. They chose to pay attention now that they cannot spin it as another temporary hiccup in the market.
Actually, you should be glad that they managed to shore up the market this long.
Maybe the US will qualify for an IMF loan. LOL
True, but I'm greedy and would like for them to have kept the secret a bit longer. I'm trying to sell a house in FL (read "DM's Secret Agenda behind his comments") and I needed the secret kept long enough for me to unloa . . . . er, sell it!!
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.