The spreading US subprime debacle is going to cost the world $400 billion (Rs15.88 trillion). The new, semi-official estimate is more than three times larger than the $120 billion of losses recognized so far by the world’s financial institutions. The additional losses could well cause much more than three times as much trouble.
The new estimate, endorsed by Goldman Sachs and the German finance minister at last weekend’s Group of Seven (G-7) conference, may still be too low, if subprime losses are followed by troubles in near-prime mortgages and consumer credit in the US, as well as in leveraged loans globally.
The damage from the losses has already been significant: lost growth, $50 billion or so of bank capital raisings and acute embarrassment for everyone connected with the supposedly low-risk financial system. Without the help of the sovereign wealth funds (SWFs), it would probably have been much worse. They have provided most of the money to rescue the troubled Western banks—quickly and at reasonable terms. SWFs haven’t said how much more support they will provide. With an estimated $2.5 trillion under management, they could cover a much larger hole than currently anticipated. But the funds may soon lose some of their enthusiasm.
They want diversified holding, not bank-heavy portfolios. And they don’t want the political flak which comes with being leading shareholders in foreign banks. Returns might also be an issue. The deeper the financial crisis proves, the more likely is a new and less profitable regulatory framework.
Suppose the SWFs do call it a day on emergency bank aid. The financial world will turn for help to its financial leaders—the finance ministers and central bankers of the G-7.
Sadly, they look lost. Their latest communiqué promises “appropriate actions” to deal with the crisis, but the suggestions seem to amount to nothing more potent than increased disclose from banks and additional studies by the authorities. The financial world raced ahead of the authorities during the boom. The authorities are still trying to catch up.
Asian stocks tumble on fears fuelled by US housing slump
Asian stocks fell, led by Kookmin Bank and Commonwealth Bank of Australia, after Group of Seven (G7) policy makers said fallout from the US housing slump may further sap global growth.
Kookmin slumped the most in more than three years as South Korean stocks resumed trading after a three-day holiday. Commonwealth Bank dropped after the nation’s central bank said it may raise borrowing costs. Reliance Power Ltd dropped on its first day of trade after it raised $3 billion (Rs11,880 crore) last month in India’s biggest share sale.
“The likelihood of a US recession now looks pretty high and it’s only a question of whether it’s going to be a long or short one,” said Nicole Sze, a Singapore-based investment analyst at Bank Julius Baer and Co., which manages $350 billion in assets worldwide. “There’s also no clarity as to whether all the subprime losses have already been accounted for.”
The MSCI Asia-Pacific excluding Japan Index lost 2.6% to 456.57 as of 6.15pm in Hong Kong, its lowest since 23 January. South Korea’s Kospi fell 3.3%. The Bombay Stock Exchange benchmark Sensitive Index slid 4.8%, the most in Asia.
Bank of Communications Ltd led Chinese financial companies lower after Goldman Sachs and Co. cut their share price targets. Hong Kong and Singapore dropped following Lunar New Year holidays. Japan, China and Taiwan were shut on Monday.
US stocks fell on 8 February, rounding off the market’s first weekly decline since mid-January. The Standard and Poor’s 500 index has fallen 9.3% amid signs of mounting losses tied to investments in subprime, or higher risk, mortgages.
Officials of G-7, which consists of the US, the UK, Canada, Italy, France, Germany and Japan, ended a weekend meeting in Tokyo saying “downside risks persist,” including the US housing slump and tighter credit conditions. “Growth is expected to slow somewhat in the short term” in “all our economies,” they said in a statement.
Kookmin, South Korea’s largest bank, lost 6.5% to 58,000 won (Rs2,447), its steepest decline since 11 June 2004.
HSBC Holdings Plc., Europe’s biggest bank by market value, slipped 4% to HK$109.30 (Rs556) in Hong Kong. Macquarie Fortress Investments Ltd, an asset manager run by Australia’s biggest investment bank, plunged 56% to 11 Australian cents after it was forced to sell US assets at a loss to repay debt. Its parent, Macquarie Group Ltd, lost 3.9% to A$60.08 (Rs2,135).
Commonwealth Bank, Australia’s No. 2, dropped 2.8% to A$48.75, snapping a two-day, 3.3% rally. Chen Shiyin/ Bloomberg
Ian C. Sayson in Manila contributed to this story.