Subprime crisis to seriously hit economies

By Kazuyoshi Abe (China Daily)
Updated: 2008-01-04 07:47

A large chunk of the world's economies, including Japan and the United States, will start to falter this year. The primary factor behind the global slowdown is the credit crisis triggered by the collapse of the US subprime mortgage market.

The subprime meltdown will gradually depress the values of securities backed by these mortgages, which have been sold to investors around the world.

The ripple effects of the debacle will spread not only in money markets but also in securities markets, pushing down stock prices the world over.

The Dow Jones Industrial Average could fall below the 10,000 mark.

In Japan, some pessimists are predicting the benchmark Nikkei Stock Average will sink below 13,000.

The financial repercussions of the subprime credit crisis that started in the summer last year will be felt in all parts of the world this year, causing a serious negative impact on the economies. Heightened anxiety about the economic outlook could make a big dent in investments.

Meanwhile, oil prices have crept up further. The price of one barrel of West Texas Intermediate (WTI) crude has surpassed $90.

Higher oil prices have driven up gasoline prices in Japan to about 150 yen ($1.2) per liter. Rising material costs have led to price hikes for a wide range of products. Dairy product makers raised the prices of their milk products for the first time in 30 years.

The Japanese government has estimated real economic growth in fiscal 2008 at 2 percent and nominal growth at 2.1 percent. But these projections are too optimistic by any measure. Morgan Stanley has announced much less upbeat economic forecasts for Japan.

The US investment bank has predicted real growth of 1.1 percent and nominal growth of 1.2 percent for the Japanese economy in fiscal 2008. Given that the negative effects of the subprime problem will continue well into 2008, Japan's growth is likely to be in the 1 percent range.

The tremors from the crumbling US mortgage market are rocking economies around the world.

Subprime mortgages are high-interest housing loans extended to people with low income. They are usually adjustable rate mortgages that start with deceptively low monthly payments in the first few years due to initial teaser rates.

But the payments usually increase quickly as the loan rates adjust, or reset. While house prices keep rising, borrowers who become unable to keep up with mortgage payments can repay the loans by selling their houses.

As the housing bubble has burst, however, house prices are now falling. This situation is generating massive ranks of people losing their homes to foreclosure.

In addition, home loans have been packaged into mortgage-backed securities and incorporated into various funds and other investment vehicles. If defaults on mortgages increase, the values of these funds decline.

The prices of real estate investment trusts, listed securities that invest directly in real estate, also decline, causing losses for banks and brokerages investing in them. Nomura Securities has announced more than 140 billion yen of paper losses related to the subprime crisis.

It is likely to take some time for the full scale of the subprime-related losses to become clear. That means an extended period of negative effects on stock prices and the yen's exchange rates.

Soaring oil prices are threatening to trigger inflation. Gasoline prices are up. Stronger demand for corn and soy beans, materials used to make bio-fuels, is pushing up wheat prices because farmers abroad are switching to producing corn from growing wheat.

The Asahi Shimbun

(China Daily 01/04/2008 page9)

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