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It’s amazing how rapidly the prospective losses from the credit crunch keep climbing.
It was only a couple of weeks ago that the G7 said that losses from sub-prime would rack up at $400bn. A week or so later, another analyst had piped up with $500bn as the likely toll.
Now this morning’s Telegraph quotes a Credit Suisse analyst as putting a $600bn figure on the final reckoning.
And even that might be too optimistic…
As Ambrose Evans-Pritchard points out in The Telegraph this morning, the credit crunch isn’t going anywhere. In fact, it’s getting worse. “The iTraxx Crossover index measuring corporate default risk in Europe smashed the 600 barrier.” This means, incidentally, that companies are having to pay six percentage points over and above the yield on ‘safe’ investments like US government-issued bonds to borrow money. “We are now far beyond the August spike.”
As the Wall Street Journal reports, even yields on municipal bonds have hit “their highest levels in history” as hedge funds have been dumping the assets, while unwinding other bets. Municipal bonds, or munis, are extremely safe assets. They are issued by local government bodies in the US to fund public works projects, among other things. They have a historic default rate of less than 1%. Basically, if these people are having to shell out extra to borrow money, there’s no hope for anyone.
Bernard Connolly at Banque AIG is quoted as saying: “The extent of deleveraging involves a wholesale destruction of credit. The risk is that the ‘shadow banking system’ completely collapses.”
Could losses total $1 trillion?
This is an unprecedented crisis, and one that the world has yet to wake up to. The ultra-bearish, but so far correct, New York professor Nouriel Roubini believes the final bill for this credit bubble explosion will be $1 trillion ($1,000 billion).
$1 trillion. I remember the days when people used the term a “trillion” to describe a ridiculously large sum, something unquantifiable. Now a “trillion” has genuine meaning. That just shows you how immense the credit bubble has been. Consumer price inflation might have been apparently tame for the last few years, but all that money being pumped into the world’s economic arteries by central banks has been going somewhere. We’ve all become used to the idea of people being billionaires, and now we’re getting used to the idea that the value destruction wrought by this crunch could run into the trillions of dollars.
This backdrop really does throw the nonsense talked about the housing market in most of the personal finance sections this weekend into sharp relief. The papers were full of stories about how difficult it would be for first-time buyers to get hold of mortgages, and how awful this was for them.
Tripe. If you happen to be a desperate would-be first-time buyer, then you should be rejoicing. House prices have only been elevated to these ridiculous levels by the easy availability of mortgage debt. That’s now vanished, which means that house prices will fall further (the average price is already down about £6,000 in the past six months, according to Nationwide).
Why first-time buyers should stop worrying
First-time buyers are the fuel on which the housing market feeds. Yes, they might have been supplanted by buy-to-let investors in recent years, but the housing market can’t be propped up by investors alone. Particularly as typical buy-to-let properties (all those two-bedroomed flats in northern city centres) look the most vulnerable to the wave of repossessions sweeping the country.
So first-time buyers should be glad to have their options cut off. It means you can stop fretting about whether you should be buying a home. Instead find a nice rental property, strike a deal with a desperate landlord, and sit tight and save for a couple of years. You’ll build up a nice tasty deposit and prices will just keep falling in the meantime.
Of course, all the other grim economic consequences of the credit bubble blow-out might mean you don’t feel quite like celebrating. But at least you’ll be in a better position than if you’d taken out a 100% interest-only mortgage in the first half of 2007.
Turning to the wider markets…
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Banks weigh on London
London’s FTSE 100 closed 81 points lower, at 5,884 on Friday. Banks including HBOS, Barclays and HSBC – which annnounces its results today – weighed heavily on the blue-chip index, although Yell was the biggest casualty with a share price tumble of over 9%. For a full market report, see: London market close
Elsewhere in Europe, the Paris CAC-40 lost 47 points to end the day at 4,790. Over in Frankfurt, the DAX-30 was down 99 points, at 6,748.
Across the Atlantic, insurance giant AIG led the fallers – after reporting the largest loss in its 90-year history – as Wall Street ended February with a sell-off. The Dow Jones tumbled 315 points to end the day at 12,266. A fall in Q4 profits for PC maker Dell hit the tech-sector and helped lead the Nasdaq 60 points lower to a close of 2,271. And the broader S&P 500 was 37 points lower, at 1,330.
In Asia, the Japanese Nikkei was down 610 points at 12,992 and the Hang Seng was at 23,584, a 746-point drop.
Gold edges closer to $1,000 an ounce
Crude oil futures were trading at $101.75, below Friday’s record high of $103.05. In London, Brent spot was last trading at $100.07.
Spot gold hit a new record high for the fourth day straight today. The yellow metal soared as high as $984.60 in Asian trade, up from $973.30 in New York late on Friday. Silver tracked gold higher to break through the $20 mark for the first time since 1980, and was last trading at $20.16.
In the currency markets, the pound was last trading at 1.9830 against the dollar and 1.3069 – close to its all-time low – against the euro. And the dollar was at 0.6589 against the euro and 102.85 against the Japanese yen.
And in London this morning, HSBC announced a 17% rise in second-half profits, to $8.24bn compared to $7.1bn the year before, as growth in emerging markets offset subprime losses. Bad loans for 2007 totalled $17.2bn. HSBC also announced that it is to raise its dividend by 11%,
Our recommended article for today…
Diamonds will continue to sparkle despite a US recession
– More evidence emerged this week that it will be some time before diamond supply increases to meet demand. To find out more about the outlook for the world’s top two producers, read:
Diamonds will continue to sparkle despite a US recession
Why Darling is losing on three fronts
– The three engines of the UK’s economic growth – property, the public sector and the City – are all stalling. Which means Chancellor Alistair Darling’s assurances that we’re well-placed to survive a global downturn are meaningless and misleading. To find out why economic mismanagement has in fact left us more exposed, read:
Why Darling is losing on three fronts