Free Republic
Browse · Search
News/Activism
Topics · Post Article

Skip to comments.

Misery may be just beginning, warns IMF
Telegraph ^ | 09/25/07 | Edmund Conway

Posted on 09/25/2007 4:40:40 AM PDT by TigerLikesRooster

Misery may be just beginning, warns IMF


By Edmund Conway, Economics Editor
Last Updated: 12:16am BST 25/09/2007

 
 Misery may be just beginning, warns IMF
The US housing market faces further falls
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.

Misery may be just beginning, warns IMF

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."


TOPICS: Business/Economy; Extended News; Foreign Affairs; News/Current Events
KEYWORDS: credit; imf; market; tlr

1 posted on 09/25/2007 4:40:41 AM PDT by TigerLikesRooster
[ Post Reply | Private Reply | View Replies]

To: TigerLikesRooster

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.


2 posted on 09/25/2007 4:44:36 AM PDT by AlaskaErik (I served and protected my country for 31 years. Democrats spent that time trying to destroy it.)
[ Post Reply | Private Reply | To 1 | View Replies]

To: AlaskaErik

Me too.


3 posted on 09/25/2007 4:45:32 AM PDT by SkyPilot
[ Post Reply | Private Reply | To 2 | View Replies]

To: TigerLikesRooster
Uncertainty and poor information about the risks associated with complex financial instruments. Greater transparency is needed.

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.

4 posted on 09/25/2007 4:52:26 AM PDT by TigerLikesRooster (kim jong-il, chia head, ppogri, In Grim Reaper we trust)
[ Post Reply | Private Reply | To 1 | View Replies]

To: TigerLikesRooster

“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.


5 posted on 09/25/2007 4:59:55 AM PDT by wolfcreek (The Status Quo Sucks!)
[ Post Reply | Private Reply | To 1 | View Replies]

To: TigerLikesRooster
...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.

6 posted on 09/25/2007 5:00:39 AM PDT by BlabItGrabIt (He Became Poor, So WE Might Be Rich :))
[ Post Reply | Private Reply | To 1 | View Replies]

To: BlabItGrabIt

“...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.


7 posted on 09/25/2007 5:03:29 AM PDT by OpusatFR
[ Post Reply | Private Reply | To 6 | View Replies]

To: BlabItGrabIt
It is the matter of timing, I guess: whether the crisis comes sooner or later. You might postpone the crisis for a while if FED raises the rate.
8 posted on 09/25/2007 5:04:08 AM PDT by TigerLikesRooster (kim jong-il, chia head, ppogri, In Grim Reaper we trust)
[ Post Reply | Private Reply | To 6 | View Replies]

To: TigerLikesRooster

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.


9 posted on 09/25/2007 5:12:36 AM PDT by BlabItGrabIt (He Became Poor, So WE Might Be Rich :))
[ Post Reply | Private Reply | To 8 | View Replies]

To: TigerLikesRooster
"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."

Article:

Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors, hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed. "Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy." Sorry about the print panel, just cancel.

The Book:

Traders, Guns & Money: Knowns and unknowns in the dazzling world of derivatives (Paperback) by Satyajit Das (Author)

10 posted on 09/25/2007 5:28:41 AM PDT by Jason_b (Click jason_b to the left here and read something about People v. De La Guerra 40 Cal. 311)
[ Post Reply | Private Reply | To 4 | View Replies]

To: TigerLikesRooster
This is a crises but property can only go so far down. The housing market dropped about 15% in my neighborhood but it seems to have stabilized. I bought some retirement property two years ago and the price has remained steady. Land still remains a scarce, non-replenishable resource.
11 posted on 09/25/2007 5:34:20 AM PDT by HarleyD
[ Post Reply | Private Reply | To 1 | View Replies]

To: TigerLikesRooster

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!


12 posted on 09/25/2007 5:51:25 AM PDT by DustyMoment (FloriDUH - proud inventors of pregnant/hanging chads and judicide!!)
[ Post Reply | Private Reply | To 1 | View Replies]

To: DustyMoment
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.

13 posted on 09/25/2007 5:58:14 AM PDT by TigerLikesRooster (kim jong-il, chia head, ppogri, In Grim Reaper we trust)
[ Post Reply | Private Reply | To 12 | View Replies]

To: AlaskaErik; SkyPilot
I think the smart money jumped at the historically low interest rates and nabbed the 15 year fixed deal.
14 posted on 09/25/2007 6:13:05 AM PDT by mr_hammer (Show me just what liberalism brought that was new, and there you will find things evil & inhuman)
[ Post Reply | Private Reply | To 2 | View Replies]

To: TigerLikesRooster

Maybe the US will qualify for an IMF loan. LOL


15 posted on 09/25/2007 1:10:37 PM PDT by texastoo ((((((USA)))))((((((, USA))))))((((((. USA))))))))
[ Post Reply | Private Reply | To 1 | View Replies]

To: TigerLikesRooster
Actually, you should be glad that they managed to shore up the market this long.

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!!

16 posted on 09/26/2007 6:55:33 AM PDT by DustyMoment (FloriDUH - proud inventors of pregnant/hanging chads and judicide!!)
[ Post Reply | Private Reply | To 13 | View Replies]

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.

Free Republic
Browse · Search
News/Activism
Topics · Post Article

FreeRepublic, LLC, PO BOX 9771, FRESNO, CA 93794
FreeRepublic.com is powered by software copyright 2000-2008 John Robinson