Sub-Prime Defaults Could Total US$150b, Says S&P

Source : The Business Times, October 10, 2007

Crisis will not peak until 2009, but emerging markets offer silver lining

(MUMBAI) The US subprime housing crisis will not peak until 2009 and total defaults could reach US$150 billion, rating agency Standard and Poor's said yesterday, but robust emerging markets would help keep global growth strong.

S&P expected the world economy to grow 3.6 per cent in 2007 and 3.5 per cent in 2008. The US economy would lag at 2 per cent in both years, down from 2.9 per cent in 2006.

'World growth remains strong despite the weaknesses seen in the US economy - especially in emerging markets because of healthy domestic demand conditions and export strength to non-US markets,' S&P said in a report released in Mumbai.

'The fact that the US slowdown is concentrated in housing, which has relatively low import content, helps,' it said.

Emerging markets were far less vulnerable to credit market turmoil than during previous crises because of the capital flows attracted by high economic growth coupled with improved corporate governance standards, S&P said.

Moreover, high commodity prices were also helping many emerging market economies, such as Latin American and African countries that are major exporters.

S&P estimated that, on a purchasing-power parity basis, the United States would contribute only 9 per cent of world growth in 2007, compared to China's 33 per cent and India's 12 per cent.

Housing was the major weakness in the US economy and the sub-prime crisis - which roiled global markets in late July and August - was far from over, although its shock value was wearing off, David Wyss, S&P's chief economist, said.

'We think in the United States the housing market is not going to bottom until winter. We think the losses in these sectors won't really hit their peak until 2009,' he said.

That would feed through to unemployment and remain a brake on growth.

'Housing starts are going to drop further, the unemployment rate is going to tick up further, we are expecting another year of sluggish US economic growth,' Mr Wyss said.

'We are not halfway through with this crisis yet.' Mr Wyss expected the US trade deficit to shrink in coming months as stronger overseas growth and a weaker dollar would make US exports more competitive. -- Reuters