US home loan crisis sparks more global turmoil
Sunday, 12 August 2007
PARIS, Aug 11 (AFP): US home loan woes caused more turmoil on world markets Friday despite the tens of billions of dollars released by central banks to stop the problem turning into a global economic crisis.
London's FTSE stock market closed a whopping 3.71 per cent lower and European and Asian shares slumped after losses tied to US subprime mortgages-high-risk home loans to people with poor credit histories-spread.
In the United States, the Dow Jones Industrial Average plunged more than 200 points in the morning but rallied late in the day to ended down just 30.32 points (0.23 per cent) at 13,240.36. The tech-rich Nasdaq composite fell 11.60 points (0.45 per cent) to 2,544.89.
The growing crisis caused the price of oil to fall for the third straight day as speculators rushed to bank profits on concerns that subprime fears might weaken energy demand.
Central banks across the world responded by pumping tens of billions of dollars into the banking system, offering loans at lower rates to commercial banks to forestall a credit crunch that could damage economic growth.
"The European financial system is facing a serious but not 'catastrophic' crisis," said an analyst at US investment bank Morgan Stanley, adding that "it may take weeks before the true depth of the credit problem is revealed."
After years of booming house prices and cheap credit-interest rates have been historically low-the US housing market is now in reverse with loans becoming more expensive and house prices falling.
This has caused high numbers of mortgage defaults and repossessions as borrowers, particularly high-risk subprime borrowers, struggle to make their repayments.
Dozens of US mortgage lenders have been put out of business and major Wall Street banks such as Bear Stearns have taken a hit.
After several weeks of turmoil on world stock markets due to the subprime crisis, fears appeared to recede earlier this week.
But French banking giant BNP Paribas spooked the market Thursday when it said it had suspended three investment funds exposed to the US housing market because it was unable to value the assets.
A short time later the European Central Bank pumped a record 94.8 billion euros into the money supply-far more than it injected in the aftermath of the September 11, 2001 attacks in the United States-and followed up with another 61.05 billion euros Friday.
The Federal Reserve for its part has pumped 62 billion dollars into the US banking system since Thursday, intervening three times Friday to shore up the country's financial system.
Central banks in Australia, Canada and Japan also injected liquidity into their markets.
But stock markets continued to slump across the world, with volatile US markets opening lower before rebounding and then falling back again in afternoon trade.
"It's that unnerving effect of the unknown which is spooking investors at the moment," said analyst Henk Potts of Barclays Stockbrokers in London.
Meanwhile, the International Monetary Fund (IMF) said yesterday that global financial market turmoil sparked by the troubled US mortgage sector and a related credit crunch should be "manageable."
The multilateral lender said global economic growth should not be derailed by the mortgage and credit jitters, which have triggered sharp falls on US, European and Asian stock markets.
"While the situation is still evolving, we continue to believe that the systemic consequences of the reassessment of credit risk that is taking place will be manageable," said IMF spokesman Masood Ahmed.
"The fundamentals supporting strong global growth remain in place, and the re-establishment of credit discipline that is occurring is a healthy development," the spokesman said.
He said IMF officials were closely tracking market developments around the globe.
The spokesman said interventions by a number of central banks, including the US Federal Reserve, which injected 38 billion dollars into the US financial system Friday, should help calm markets and soothe rattled investors.
London's FTSE stock market closed a whopping 3.71 per cent lower and European and Asian shares slumped after losses tied to US subprime mortgages-high-risk home loans to people with poor credit histories-spread.
In the United States, the Dow Jones Industrial Average plunged more than 200 points in the morning but rallied late in the day to ended down just 30.32 points (0.23 per cent) at 13,240.36. The tech-rich Nasdaq composite fell 11.60 points (0.45 per cent) to 2,544.89.
The growing crisis caused the price of oil to fall for the third straight day as speculators rushed to bank profits on concerns that subprime fears might weaken energy demand.
Central banks across the world responded by pumping tens of billions of dollars into the banking system, offering loans at lower rates to commercial banks to forestall a credit crunch that could damage economic growth.
"The European financial system is facing a serious but not 'catastrophic' crisis," said an analyst at US investment bank Morgan Stanley, adding that "it may take weeks before the true depth of the credit problem is revealed."
After years of booming house prices and cheap credit-interest rates have been historically low-the US housing market is now in reverse with loans becoming more expensive and house prices falling.
This has caused high numbers of mortgage defaults and repossessions as borrowers, particularly high-risk subprime borrowers, struggle to make their repayments.
Dozens of US mortgage lenders have been put out of business and major Wall Street banks such as Bear Stearns have taken a hit.
After several weeks of turmoil on world stock markets due to the subprime crisis, fears appeared to recede earlier this week.
But French banking giant BNP Paribas spooked the market Thursday when it said it had suspended three investment funds exposed to the US housing market because it was unable to value the assets.
A short time later the European Central Bank pumped a record 94.8 billion euros into the money supply-far more than it injected in the aftermath of the September 11, 2001 attacks in the United States-and followed up with another 61.05 billion euros Friday.
The Federal Reserve for its part has pumped 62 billion dollars into the US banking system since Thursday, intervening three times Friday to shore up the country's financial system.
Central banks in Australia, Canada and Japan also injected liquidity into their markets.
But stock markets continued to slump across the world, with volatile US markets opening lower before rebounding and then falling back again in afternoon trade.
"It's that unnerving effect of the unknown which is spooking investors at the moment," said analyst Henk Potts of Barclays Stockbrokers in London.
Meanwhile, the International Monetary Fund (IMF) said yesterday that global financial market turmoil sparked by the troubled US mortgage sector and a related credit crunch should be "manageable."
The multilateral lender said global economic growth should not be derailed by the mortgage and credit jitters, which have triggered sharp falls on US, European and Asian stock markets.
"While the situation is still evolving, we continue to believe that the systemic consequences of the reassessment of credit risk that is taking place will be manageable," said IMF spokesman Masood Ahmed.
"The fundamentals supporting strong global growth remain in place, and the re-establishment of credit discipline that is occurring is a healthy development," the spokesman said.
He said IMF officials were closely tracking market developments around the globe.
The spokesman said interventions by a number of central banks, including the US Federal Reserve, which injected 38 billion dollars into the US financial system Friday, should help calm markets and soothe rattled investors.