Tuesday, March 13, 2007

Sub-prime market woes deepen

Will the sub-prime mortage market in the US prove the trigger for the correction in financial markets that many analysts have long been predicting? I flagged this issue in an earlier post (Shocker from HSBC). At the time, it seemed the problem might just be manageable. But with each passing day, doubts grow. The Financial Times (March 13) reports on the latest collapse in this market:

Trading was halted in New Century Financial on Monday with the second-largest US subprime lender teetering on the edge of bankruptcy, sparking fresh fears about whether turmoil in the sector could spread and damp US economic growth.....

The rapid decline of New Century, the latest problem at US subprime lenders, raised concerns that problems could spread in the $8,000bn mortgage industry and to other parts of the capital markets.


The problem is two fold. One, as the sub-prime lenders go under, they drag down banks who have lent to them and those in the derivatives market who have positions on sub-prime loans. Two, as sub-prime loans dry up, property prices tumble, dragging down more players and creating further problems for those exposed to sub-prime lenders. A further decline in housing prices will mean further decleration in the US economy and an increase in non-performing assets in other sectors as well. So, the billion dollar question remains: can the problems in the sub-prime market be contained?

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