? ?
WORLD / America
US homeowner woes felt around world
(Agencies)
Updated: 2007-08-13 10:18
Frankfurt --?The latest crisis in financial markets has once again served
as a reminder of how vital and interconnected the health of the US
economy is to that of the rest of the world.
From New York to Frankfurt to Tokyo, markets were jolted in the past week
by fears that Americans are failing to keep up with their mortgage
payments and the ripple effects that could have on the global banking and
financial system.
The fallout could further depress US housing prices by making it harder
to find buyers for a glut of foreclosed homes. That, coupled with a drop
in the value of investments, could leave US consumers feeling poorer and
less likely to spend on domestic and imported goods.
"The sharp falls in global stock markets obviously affect consumer
wealth, which again could dampen spending," said Howard Archer, chief
British and European economist at Global Insight.
The most immediate effect for the half of all American households who own
mutual funds and other individual investors worldwide is a decline in the
value of their investments, which may or may not be short-lived.
Around the globe, small-time investors are taking a beating. Stock prices
have slid in recent days as fears of the market crisis infected markets
worldwide. Worried investors sold stocks but finding buyers was hard,
which caused share prices to dip even lower.
"We all feel threatened, problems on the stock exchange have consequences
for the economy of America and of the world" said Gabriella Savarini, a
69-year-old shopkeeper in Rome. "America influences all, for good or for
bad."
The distress in the markets makes it harder and more expensive for
businesses and consumers to get loans and cash, Archer said. If companies
cannot get loans, they cannot expand and may have to cut expenses,
typically through layoffs.
America faced a crisis similar to the current mortgage fiasco when
hundreds of savings and loan companies went belly-up in the 1980s. Back
then, the fallout did not spread dramatically to foreign shores because
the US government stepped in to bail out the banks and repay depositors.
But the past two decades have seen a quantum leap in globalization and
outsourcing, crumbling trade barriers, and a revolution in financial
markets have knit the world tightly together.
A steep sell-off in global markets on Thursday and Friday was triggered
by distress signals from France's biggest bank, BNP Paribas, which had to
freeze billions of dollars in assets in three mutual funds because of the
falling value of securities linked to high-risk mortgages taken out by US
borrowers.
"I'm sitting here in Brazil and Brazilian markets have gotten crushed by
this. ... It's hit all the emerging markets," said Kenneth Rogoff, a
former director of research at the International Monetary Fund and now a
professor at Harvard University. "If this were to snowball next week, it
would affect markets in Turkey, Indonesia."
Global interdependency isn't a recent phenomenon: The Wall Street stock
market crash of 1929 and the Great Depression affected the entire world,
and helped create the conditions for the rise of fascism in Europe.
But with faster communications and real-time trading, market jitters in
New York race around the world almost instantly today.
At the center of the concerns are high-risk loans to individuals or
businesses made by banks globally.
More Americans are failing to keep up with their home mortgage payments,
and there are concerns that this could ripple around the globe because
much of the debt from mortgages has been packaged into securities sold to
pension funds, banks and other investors who were hungry for high returns
on investments.
The same mortgage securities in the US that are crumbling in value are a
part of bigger holdings that banks from Japan to Germany bought into
because of low US interest rates and a good returns. That is, until the
mortgage holders started defaulting.
Meanwhile, the ability of banks to convert assets to cash quickly was in
doubt because some were unable to track how much money they poured into
now worthless securities backed by sub-prime US mortgages, or loans made
to high credit-risk individuals.
Those bad loans raised fears of broader credit troubles that could affect
the entire banking and financial system?-- concerns that caused stock
markets to plummet and threatened pensions.
The slide started innocuously in April after New Century Financial, a US
mortgage lender whose principle borrowers were Americans with
less-than-stellar credit, filed for bankruptcy protection. Its customers
were people who may have been late on credit card payments, maybe even
filed bankruptcy in previous years, but still wanted a shot at buying
their own home.
Lenders were only too happy to oblige?-- flush with cash and eager to
exploit new markets so they could, in turn, lend more money and increase
their profits.
Hedge funds and banks worldwide saw a market with opportunity and bought
up mortgage-backed securities.
A month later, USB AG, the giant financial company, said its hedge fund
business had lost $125 million in the first quarter largely on the back
of investments in the US sub-prime mortgage field. Then in July, Wall
Street's Bear Stearns closed a pair of hedge funds after it lost more
than $20 billion on mortgage-backed investments.
In early August, concerns mounted that those mortgage securities may not
have been as solid as people thought.
Those fears were capped by the Aug. 6 bankruptcy by Melville, NY-based
American Home Mortgage Investment Corp. American Home, once a major US
mortgage lender, said it fell victim to "extraordinary disruptions" that
effectively cut off the funding it needed to make new loans.
On Thursday, France's biggest bank, BNP Paribas, froze $2.2 billion held
in three funds because their exposure to sub-prime mortgages in the US
That intensified fears that risk was spreading worldwide.
With cash reserves running low, the interest rates that banks charge each
other for overnight loans rose so steeply that central banks in the US,
Europe and Asia poured tens of billions of dollars into the market to
make sure enough cash was available to meet demand.
Such large-scale central bank interventions are rare?-- that last major
injection came immediately after the Sept. 11 attacks in 2001.
Top World News ?
* US homeowner woes felt around world
* Italy probe unearths huge Iraq arms deal
* 5 American soldiers killed near Baghdad
* Taliban says not freeing Korean hostages - report
* Bush, Sarkozy pledge close ties
Today's Top News ?
* Dollar assets key part of China's reserves: PBOC
* SCO states begin phase II of joint drill
* Scheme to create startup business
* Taliban still says 2 Koreans to be freed
* Drill not to push SCO into military bloc
Most Commented/Read Stories in 48 Hours
Learn Chinese, Learn Mandarin online, Learning Materials, Mandarin audio lessons, Chinese writing lessons, Chinese vocabulary lists, About chinese characters, News in Chinese, Go to China, Travel to China, Study in China, Teach in China, Dictionaries, Learn Chinese Painting, Your name in Chinese, Chinese calligraphy, Chinese songs, Chinese proverbs, Chinese poetry, Chinese tattoo, Beijing 2008 Olympics, Mandarin Phrasebook, Chinese editor, Pinyin editor, China Travel, Travel to Beijing, Travel to Tibet
No comments:
Post a Comment