United States, Australia and now Germany and Paris. The sub-prime virus has infected financial institutions across the world. Is China the next target?
What began as an infection in the US, is now a global epidemic. Payment defaults on subprime mortgages, or risky home loans given to people with poor credit history, has had ripple effects on economies and has shaken markets worldwide. First casualty - New York based Bear Sterns…its hedge funds which had huge investments in the housing market collapsed last month. This sent jitters across global markets and sent its boss Warren Spector home.
Then the sub-prime virus hit Australia. Macquarie Bank's Fortress Fund cautioned investors of 25% losses triggering global markets to tank yet again. Now in Europe, the crisis has forced France's biggest listed bank, BNP Paribas to freeze 3 funds with investments of over 1.6 billion euros.
American International Group, among the top U.S. mortgage lenders, said rising defaults and delinquencies are moving beyond subprime a day after posting solid second-quarter earnings. Goldman Sachs fell 6% Thursday amid reports that two of its hedge funds were among those suffering big losses recently and that they were liquidating some positions.
Some 46 corporate loan or bond deals worth over $ 60 billion have been delayed or cut in price since June 22, according to Baring Asset Management. It estimated some $ 400 billion worth of takeovers have yet to be financed. If demand for such assets dried up, it could mean big problems for markets pushed to record highs earlier this year on record buyout and merger activity.
Near-term contagion fears among large bankers and lenders will remain the biggest worry for investors, central bankers and the economy. The worry here is that a panic will set in to the financial markets and that this 'credit crunch' will spread to areas that are not being directly affected by the subprime meltdown, analysts say. The worry is credit-worthy companies will not be able to borrow or spreads for fairly high quality corporate bonds may go up quite a bit, they add.
Meanwhile, the White House also weighed in to reassure markets. "The fundamentals of our economy are strong," President George Bush told reporters. "I'm told there is enough liquidity in the system to enable markets to correct." Sen. Charles Schumer, D-N.Y., blasted back. In a press release, he called Bush "asleep at the switch" regarding credit market problems. The Treasury Department said it was keeping a close eye on markets.
The Fed has maintained its position that it won't alter its hawkish policy stance unless market trouble spills over into the economy. Several economists at major U.S. banks and research firms have cut GDP forecasts in recent weeks. Most still see moderate growth this year. But the housing slump, sluggish retail sales and falling stock prices are notable head winds.
Sensing panic selling and hence a liqudity crisis, European Central Bank said it will provide liqudity via overnight repo at 4%. So who's next? Now analysts say the crisis may hit Chinese banks, since they have significant exposure to US credit markets.
But Indian banks seem to have escaped. Only Indian banks with international branches can invest in foreign debt like credit default swaps and credit linked notes. ICICI heads with an exposure of $ 1.5 billion, SBI has an exposure of $ 900 million, Bank of India $ 440 million & UTI Bank $ 150 million.
All banks except ICICI say they are invested only in debt issued by Indian companies. Following the sub-prime loan problem, spreads of all swaps have gone up, which means their price has gone down. But these will be marginal compared to the size of their balance sheets.
What began as an infection in the US, is now a global epidemic. Payment defaults on subprime mortgages, or risky home loans given to people with poor credit history, has had ripple effects on economies and has shaken markets worldwide. First casualty - New York based Bear Sterns…its hedge funds which had huge investments in the housing market collapsed last month. This sent jitters across global markets and sent its boss Warren Spector home.
Then the sub-prime virus hit Australia. Macquarie Bank's Fortress Fund cautioned investors of 25% losses triggering global markets to tank yet again. Now in Europe, the crisis has forced France's biggest listed bank, BNP Paribas to freeze 3 funds with investments of over 1.6 billion euros.
American International Group, among the top U.S. mortgage lenders, said rising defaults and delinquencies are moving beyond subprime a day after posting solid second-quarter earnings. Goldman Sachs fell 6% Thursday amid reports that two of its hedge funds were among those suffering big losses recently and that they were liquidating some positions.
Some 46 corporate loan or bond deals worth over $ 60 billion have been delayed or cut in price since June 22, according to Baring Asset Management. It estimated some $ 400 billion worth of takeovers have yet to be financed. If demand for such assets dried up, it could mean big problems for markets pushed to record highs earlier this year on record buyout and merger activity.
Near-term contagion fears among large bankers and lenders will remain the biggest worry for investors, central bankers and the economy. The worry here is that a panic will set in to the financial markets and that this 'credit crunch' will spread to areas that are not being directly affected by the subprime meltdown, analysts say. The worry is credit-worthy companies will not be able to borrow or spreads for fairly high quality corporate bonds may go up quite a bit, they add.
Meanwhile, the White House also weighed in to reassure markets. "The fundamentals of our economy are strong," President George Bush told reporters. "I'm told there is enough liquidity in the system to enable markets to correct." Sen. Charles Schumer, D-N.Y., blasted back. In a press release, he called Bush "asleep at the switch" regarding credit market problems. The Treasury Department said it was keeping a close eye on markets.
The Fed has maintained its position that it won't alter its hawkish policy stance unless market trouble spills over into the economy. Several economists at major U.S. banks and research firms have cut GDP forecasts in recent weeks. Most still see moderate growth this year. But the housing slump, sluggish retail sales and falling stock prices are notable head winds.
Sensing panic selling and hence a liqudity crisis, European Central Bank said it will provide liqudity via overnight repo at 4%. So who's next? Now analysts say the crisis may hit Chinese banks, since they have significant exposure to US credit markets.
But Indian banks seem to have escaped. Only Indian banks with international branches can invest in foreign debt like credit default swaps and credit linked notes. ICICI heads with an exposure of $ 1.5 billion, SBI has an exposure of $ 900 million, Bank of India $ 440 million & UTI Bank $ 150 million.
All banks except ICICI say they are invested only in debt issued by Indian companies. Following the sub-prime loan problem, spreads of all swaps have gone up, which means their price has gone down. But these will be marginal compared to the size of their balance sheets.
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