Write-Downs From Sub-Prime Problems Could Touch $568b

Source : The Straits Times, Feb 12, 2008

THE bloodbath is not over yet.

Sub-prime-related write- offs may hit US$400 billion (S$567.8 billion) - more than treble the US$130 billion losses that Wall Street banks and other financial institutions have revealed in recent weeks, according to the world's top finance officials.

Speaking on Saturday after last weekend's Group of Seven (G-7) meeting in Tokyo, German Finance Minister Peer Steinbrueck said the grouping now feared that write-offs of losses on securities linked to United States sub-prime mortgages could reach US$400 billion.

This is also far bigger than the US Federal Reserve's estimates for sub-prime losses last year of US$100 billion to US$150 billion.

According to Bank of Italy governor Mario Draghi, the next two weeks will be critical in revealing how much damage the credit crisis has done to the global financial system.

'The next 10 days to two weeks will be crucial because we are going to have the first audited accounts from financial institutions since the crisis started,' said Mr Draghi, who is the chairman of the Financial Stability Forum (FSF). The FSF, a committee of international regulators and central bankers, is heading an international inquiry into the crisis.

Some of the world's biggest banks have already disclosed billions of dollars of bad credits related to the US sub-prime mortgage market collapse, but these are only preliminary estimates, he added.

'Auditors have become more vigilant' as the fallout from the sub-prime crisis continues to spread and audited accounts for last year could reveal a grimmer picture, Mr Draghi told The Business Times.

The FSF's preliminary report at the G-7 meeting warned that 'there remains risk that further shocks may lead to a recurrence of the acute liquidity pressures experienced last year', adding that 'it is likely we face a prolonged adjustment, which could be difficult'.

Mr Draghi also said regulators were ready to force banks to reveal their losses and replenish their equity ratios.

He did not rule out the possibility that governments might eventually need to inject capital into banks, although he stressed that market solutions should take precedence. The FSF will issue its full report on the causes of the credit crisis and ways to tackle it in April.

The G-7 policymakers, in their statement, painted a grim picture, saying the US economy may slow further, eroding global growth, while banks, despite falling interest rates, will tighten credit even further.

While the G-7 did not propose specific measures, European Central Bank (ECB) president Jean-Claude Trichet said countries will do what was necessary, both individually and collectively, to counter a 'significant market correction'.

Economists, however, said the ECB is held back from cutting interest rates by its fears of rising inflation.

'The problems are going right through all parts of the financial markets and there's not much the G-7 can do about this,' Mr Gilles Moec, an economist at Bank of America in London, told Australia's The Age newspaper.

'There's a danger that the downturn will become a self- fulfilling prophecy,' he was quoted as saying.