US subprime losses may reach US$300bil


SINGAPORE: Losses from US subprime mortgage foreclosures, coupled with slowing economic growth and falling house prices, could reach as much as US$300bil, the Organisation for Economic Cooperation and Development (OECD) said. 

Global stock markets have lost US$2.9 trillion since Oct 31 and the collapse of the subprime market in the United States has triggered about US$50bil in writedowns among the world's largest banks. 

The US dollar could also face further downward pressure as overseas investors who previously bought structured products based on subprime loans become more unwilling to buy higher-yielding debt, the OECD said. 

“Recent economic news points towards a more protracted economic adjustment,'' it said in a report released in Paris yesterday. “A recession in the US is now seen as more likely than before by some observers.'' 

The number of economists forecasting a US recession almost doubled in the past two months, according to a survey by the National Association for Business Economics. 

US home foreclosures doubled in the third quarter from a year earlier as subprime borrowers failed to make higher payments on adjustable-rate mortgages. The jump in foreclosures is exacerbating the US housing recession by increasing the number of homes on the market as sales and prices decline. 

Foreclosures are likely to rise over the next few quarters, and the “adjustment'' in the US housing market has “a way to go'', Federal Reserve Bank of Minneapolis president Gary Stern said this week. 

“Roughly a fifth of subprime mortgages are estimated to be at risk of default,'' the OECD said. “The ultimate size of losses and their impact on financial institutions will not be independent of what happens to interest rates.'' 

Interest rates on about US$750bil of subprime loans may be reset this year, and the amount would probably climb to US$890bil in 2008, the OECD said. 

Slower economic growth may also lead to “periodic volatility'' in equity markets, according to the report. “Thus far, equity investors seem to have shrugged off the negative sentiment that prevailed over the summer, but it may be too soon to draw firm conclusions,'' the OECD said. 

The US dollar has fallen against 14 of the 16 most actively-traded currencies this year. – Bloomberg  

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