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Credit markets still vulnerable. Liquidity still an issue for the world banks. European mortgage and debt markets next to collapse after the US?

Posted by Adrian on September 7, 2007

The credit crisis that has developed across all the banking sectors worldwide is still spreading and causing jitters in interbank lending. The risk? Refinancing. From possible bad debt sitting in conduits. The mortgage crisis in America has spread, costing investments banks, retail banks, mutual funds and hedge funds billions. Balance sheets have shrunken and the redefining of risk and accounts has occurred. This is a serious and unmistakable precursor to a wider situation occurring in the financial sector. One that is the current credit crunch and a liquidity issue, with the amount of commercial debt, collaterized debt obligations and other complex financial investment instruments; the other is the rising costs for borrowers, who will inevitably feel the sting as the banks reign in costs. Credit spreads widen, and interest rates will inevitably increase. From the interbank interest rate to the bank to borrower interest rate. So the subprime, or general mortgage crisis in America (the constant rising defaults and foreclosures) will possibly be a worldwide event too. Spain, UK, Italy and other parts of Europe have huge over inflated property markets Spain particularly is suffering from massive mortgage debt and household debt, refer to graph:

ccliam29big.jpg

Does this equate to a dramatic slow down in the Spanish economy? Possibly as the credit markets worldwide are tightening their risk, the credit crunch may have harsher detrimental effect to economies that have accelerating faster than others, such as the Spanish economy. From the International Herald Tribune August 23, 2007:

“Spanish household debt is also among the highest in Europe at 130 percent of disposable income. Heavy borrowing means Spanish banks are cranking up credit restrictions despite expectations the European Central Bank may be near the end of its rate tightening cycle.

Tighter borrowing conditions are beginning to be a worry due to the already high levels of debt,” said Deloitte in a recent research note on Spain.”

Is the rest of Europe vulnerable? With the current credit crisis and liquidity crisis occurring amongst banks, there is also underling increases in inflation. Most likely the inflation will occur from food prices, particularly bread, pasta and other wheat prices increasing due to the global demand on wheat markets, Times Online article 6 September 2007:

” According to the International Grain Council, wheat stocks are at their lowest level for 25 years and exports from the big five wheat producers — the EU, the US, Australia, Canada and Argentina have halved in three years.”

The European Central Bank recently (6 September 2007) left interests rates on hold at 5.75 percent, Bloomberg article 6th September 2007:

“The ECB finds itself in a dilemma,” said Rainer Guntermann, an economist at Dresdner Kleinwort in Frankfurt. Economic fundamentals require at least one more rate increase and inflation concerns haven’t eased. On the other hand, it needs to deal with market turbulence.”

Europe may also be facing a housing mortgage /debt problem, ignited by the US decaying mortgage crisis and their accompanying bad debt circulating around the world.

link refs:

Herald Tribune

Bloomberg

Times Online

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3 Responses to “Credit markets still vulnerable. Liquidity still an issue for the world banks. European mortgage and debt markets next to collapse after the US?”

  1. […] through to Asian. Most notable countries (in the EU) that appear vulnerable to credit crunches are Spain and Ireland. Regarding the Irish property markets, from […]

  2. […] market in Spain. More detailed analysis of the Spanish market was looked at with the article Credit markets still vulnerable. Liquidity still and issue for the world banks. European mortgage an… Recently I discussed the severe ramifications of a global meltdown of the mortgage markets […]

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