Asia Yet To Feel Full Sub-Prime Impact: Stanchart Exec

Source : The Business Times, November 30, 2007

Asia and the rest of the world have yet to see the full impact of the fallout from the collapse of the US sub-prime mortgage market, the South-east Asia head of Standard Chartered said yesterday.

Ray Ferguson, who was until recently the international banking group's US country head, warned that conditions in the housing market there are likely to worsen as more 'teaser-rate' mortgages - those sold with low initial interest rates - reset to higher interest rates in the coming months.

This is expected to trigger new defaults on home loans and lead to more homes being repossessed, which would in turn further dampen consumer and business spending and cause the US economy to grow at a slower pace or even shrink.

Also, further increases in the already high price of oil and the falling value of the US dollar, potential instability in Iran and the rest of the Middle East region 'will all put downward pressure on the US economy and affect consumer confidence further as we go into next year', he warned.

And while Singapore and Asia generally have seen 'dramatic development' in the decade since the financial crisis of 1997, 'we haven't that decoupled from the US and we will feel the force of any major decline'.

Mr Ferguson was speaking to members of the British Chamber of Commerce here at a lunch talk yesterday.

Despite the estimated US$50 billion worth of losses suffered by major banks and other financial institutions so far as a result of the recent financial turmoil, 'the worst of the sub-prime crisis and the fallout from it will not actually be felt until well into next year', he said.

The reason: 'There are hundreds of billions of dollars of low teaser-rate mortgages that haven't reset to the new higher interest rates yet. That's going to happen as we move through 2008. That's going to cause more defaults and repossessions.'

Banks are likely to report more damage to their bottom lines as they come under pressure from auditors to state the value of their investments in debt securities based on what they would fetch in the current market, rather than based on internal models, he said.

'Marking to market when there is a limited market is going to cause a few institutions to have a huge whack to the capital base. That means they're going to have to raise more money or face having to throw in the towel.'

Standard Chartered, which makes most of its profits from Asia, Africa and the Middle East, has no direct exposure to US sub-prime mortgages, he said.

'It's unclear whether the US is going to slide into recession, but the risk does appear to be increasing and there's a real need for caution. Market volatility will affect us here, and lead quickly to sub-par growth as we move forward.'

In Asia, 'the good news is that we still have strong demand out there and consumer and investment sentiment that's positive,' he said. 'This should partially offset the decline that is inevitably on its way across the Pacific.'