PARIS : US home loan woes caused more turbulence 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 percent lower and European and Asian shares slumped after losses tied to US sub-prime mortgages -- high-risk home loans to people with poor credit histories -- spread. The growing crisis caused the price of oil to fall for the third straight day as speculators rushed to bank profits on concerns that sub-prime fears will 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 the Morgan Stanley US investment bank, 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 higher numbers of defaults and repossessions as borrowers, particularly high-risk sub-prime borrowers, struggle to make their repayments.
After several weeks of turmoil on world stock markets due to the sub-prime crisis, fears appeared to recede earlier this week.
But on Thursday French banking giant BNP Paribas spooked the market 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 on Friday.
The Federal Reserve for its part pumped 35 billion dollars into the US banking system, and on Friday said it was injecting cash for the third time in one day, without providing the amount.
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 moving sharply lower before rebounding in early 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.
Banking stocks were among the worst hit.
"Investors don't know which banks have got exposure (to the credit problems) and the extent to those potential losses," said Potts of Barclays.
But he added: "We suspect that the underlying picture is more positive than the knee-jerk reactions that we have been seeing in terms of the (stocks) sell-off for the last couple of sessions."
The human face of the current financial crisis is likely to be a low-earning American, possibly someone who took on a mortgage they could ill-afford and whose mortgage broker did inadequate checks on their ability to repay.
The link between these people and turmoil in financial markets involves much financial trickery that enabled banks and funds all over the world to make investments that are essentially bets on borrowers repaying their mortgages.
Banks are now setting aside cash as a precaution against further losses from their bad investments and have become far more cautious about lending.
This is known as a "credit squeeze," but the fear is that this could become a veritable "credit crunch" in which companies and consumers have inadequate access to loans.
A shortage of liquidity would restrict the ability of companies, and eventually consumers, to borrow, potentially slowing economic growth worldwide. - AFP /ls
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