US Recession Will Be Mild, Predicts S&P

Source : The Business Times, March 17, 2008

THE US will suffer a mild recession that could end as early as the later part of this year, according to ratings agency Standard & Poor's.

It's the uncertainty surrounding the credit crunch caused by the sub-prime problem that has led to the present economic condition, said Paul A Coughlin, S&P executive managing director for corporate and government ratings.

But he thinks that much of the pessimism is overblown and that Asian economies are still growing despite a slowdown in their growth rates. 'China growing at 9 per cent under the current scenario is nothing to sniff at,' he told BT in Singapore.

He said that the total global writedowns for the sub-prime instruments could amount to as much as US$450 billion with financial institutions such as banks, brokers and monolines accounting for some US$285 billion (about half of which has already been disclosed). This compares with some estimates of over US$1 trillion.

'However, illiquidity has spread rapidly into other credit markets, including other parts of the structured finance market, the bond insurers market and the bank loan market. How quickly and well this is dealt with will have an impact on how long the recession will last,' he added.

His views are shared by his colleagues who, in a report dated March 13 and entitled More sub-prime writedowns to come, but the end is now in sight for large financial Institutions, noted that, in particular, the bulk of the writedowns of sub-prime securities may be behind the banks and brokers that have already announced their results for full-year 2007.

Said S&P credit analyst Tanya Azarchs: 'There may be some additional marks to market as market indicators have shown deterioration in the first quarter. However, when we dissect the percentage of writedowns taken against various types of exposures, in our opinion, the magnitude of some writedowns is greater than any reasonable estimate of ultimate losses.'

However, S&P feels that right now, market forces are placing further downward pressure on valuations, and it expects to see more writedowns related to these pressures in coming weeks and months.

'We believe that any near-term positive impact of reducing sub-prime risk in the financial system via increased disclosure and writedowns will be offset by worsening problems in the broader US real estate market and in other segments of the credit markets,' said another S&P credit analyst, Scott Bugie.

Asked if ratings agencies like his should accept at least some of the blame for the sub-prime problem by giving them high credit ratings, Mr Coughlin said that finger-pointing would not help resolve the problem, as even regulators were caught off-guard by the extent of the problem.

'We should move on and see how best we could improve the system,' he said, adding that there should be better monitoring of the structured debt market.

He said that, as part of a move to improve transparency in its ratings process, S&P would be setting up an office of the Ombudsman that would address concerns relating to potential conflicts of interest and to whom issuers, investors, employees and other market participants can raise concerns about potential conflicts of interest and integrity of business and compliance processes.

The ombudsman will report to S&P's president but will not be part of its management and his compensation will not be tied in any way to S&P/McGraw-Hill business results. He said that this mechanism would provide one central point where any concerns about the objectivity or soundness of the rating and other business processes can be raised.

Another measure will result in the establishment of an enterprise-wide Risk Assessment Oversight Committee that operates separately and independent of the business. The committee will assess all risks that could impact the ratings process. This committee will also assess the feasibility of rating new types of securities.