Sub-Prime Crisis May Envelop Whole Of US Economy

Source : The Business Times, September 11, 2007

Central banks say they will remain alert but won't bail out bad investors

(BASEL) The crisis in the US housing market risks spreading to the whole of the nation's economy, European Central Bank chief Jean-Claude Trichet said yesterday on behalf of world central bankers.

He was speaking in his capacity as head of the G-10 group of central bankers from industrialised and emerging economies, who met at the Bank for International Settlements here.

'There is a probability of fallout on the real economy in the USA,' Mr Trichet said. 'We will have to follow very carefully what happens particularly in the USA. We will remain . . . alert, (there is) no time for complacency,' he added.

Mr Trichet said central banks had an interest in securing market stability but this did not extend to giving lifelines to imprudent investors who have got their fingers burned in the recent turbulence.

'It's certainly the sentiment of central bankers who are around the table that bailing out bad investors would be the worst thing to do,' he said.

US Federal Reserve chairman Ben Bernanke, Bank of Japan governor Toshihiko Fukui, Bank of England governor Mervyn King, Zhou Xiaochuan from the People's Bank of China and Bank of Canada Governor David Dodge were among those who attended the meeting.

Mr Trichet stressed the relative good health of the rest of the global economy outside the US, and of emerging markets in particular. 'The global economy has solid fundamentals,' he said. 'Very significant progress has been made in the emerging world. The fundamentals have been considerably improved, progress has been made in fostering local financial markets,' he added.

The ECB last Thursday voted to keep its interest rates on hold amid financial market and credit jitters. The US Federal Reserve is widely expected to trim borrowing costs at a scheduled Sept 18 meeting.

The US home loan trauma has prompted banks to choke off lending to each other as they strive to calculate exposure to the sector, forcing central banks to pump emergency funds into the financial system.

Official figures yesterday showed that Japan's economy shrank more than expected in the second quarter. The 0.3 per cent fall was bigger than forecasts for a 0.2 per cent contraction.

That followed data on Friday showing US payrolls shrank in August for the first time in four years. The twin reports hardened prospects that the Bank of Japan will hold interest rates steady and the Fed will cut them to temper the worst effects of the crisis. -- AFP, Reuters, Bloomberg