Tuesday 2 September 2008

Credit crisis: $716b written off, more losses to come

GENEVA: The credit crisis has forced financial firms to write down US$503 billion (S$716 billion) worth of assets, but more losses could yet come in months ahead, the top world central banking body has warned.

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Guanyu said...

Credit crisis: $716b written off, more losses to come

Sep 2, 2008

GENEVA: The credit crisis has forced financial firms to write down US$503 billion (S$716 billion) worth of assets, but more losses could yet come in months ahead, the top world central banking body has warned.

The notion that rapidly growing emerging markets were less reliant on developed markets has also been put to the test in recent months, particularly for countries that drew large investments from advanced economies, the Bank for International Settlements (BIS) said on Sunday.

Inflation further bit into household and corporate earnings in emerging markets, dampening investor sentiments, added the BIS, also known as the central bank for central bankers.

In its latest review of the global financial markets from the end of May to late last month, the Basel-based BIS said that overall market sentiment improved in July but that this optimism proved to be short-lived.

In particular, news of larger-than-expected quarterly losses at two large United States housing agencies and at major insurance firms ‘served as reminders that concerns about asset quality were likely to persist’.

‘Despite an aggregate US$503 billion of assets written down by banks and brokerages since the start of the credit crisis in 2007, further writedowns and outright asset disposals were thus seen as continuing over the coming months, adding to existing capital constraints and related funding needs,’ it pointed out.

In July, the US government intervened to prevent a meltdown of housing finance giants Fannie Mae and Freddie Mac, which underpin some US$5 trillion in home loans, and whose shares were in free fall.

Meanwhile, the BIS pointed out that emerging markets, which many had hoped would withstand the credit crisis, also ‘witnessed a dramatically changing environment in recent months’.

Expectations of slower growth in advanced economies and higher inflation dampened investor sentiment.

This further put pressure on countries that depended on investments from advanced economies, such as Eastern European countries which tend to rely on investments from the European Union.

Inflation posed a further challenge to real incomes and corporate earnings in these markets.

‘As a result, previous views about emerging markets decoupling were increasingly challenged, and changes in macroeconomic conditions and associated economic policies gained increased investor attention,’ said the BIS.

In late June, the BIS had warned that the global economy could be heading into an unexpectedly severe downturn, blaming cheap lending.

For the BIS, the sub-prime mortgage market, or credit given to borrowers with poor credit ratings, was not a root cause of the turmoil, but a trigger.

The real culprit, it said, was simply lax credit.

AGENCE FRANCE-PRESSE