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Published on September 11, 2007

In a report entitled "SCBS Economics: What is the Impact of the Sub-Prime Crisis on Thailand?", Sethaput Suthiwart-Narueput, the chief economist of SCB Securities, said that both the direct and indirect impact of the problem upon Thailand had been small.

The direct impact is small because Thai banks' exposure to US sub-prime-related instruments is also small. Overall, their exposure in collateralised debt obligations (CDOs) amounts to only US$715 million (Bt24.5 billion). BankThai has had the largest CDO exposure with $425 million, or about 6.4 per cent of its assets. The other large banks have reported much smaller CDO exposure, with Bangkok Bank holding CDOs worth about 0.1 per cent of its assets, followed by Krung Thai Bank (0.4 per cent) and Bank of Ayudhya (0.4 per cent).

Writing off some of the losses from this exposure would not have any major impact on the underlying financial status of Thai banks.

The indirect impact of the US sub-prime crisis here has also been limited. The SET Index has fallen in tandem with regional markets, but interbank rates and government and corporate bond yields have not changed significantly in the global credit crunch.

 At the global level, institutions are facing losses on their holdings of financial instruments related to US mortgage-backed securities because of deliquencies and defaults by home-loan borrowers. This has resulted in outright losses, wider credit spreads and a credit crunch. US and European financial institutions will be bearing the brunt from this round of the crisis. The US Fed now stands ready to cut interest rates in order to relieve the credit crunch.

So when is the sub-prime crisis going to be over?

Well, as they say, it ain't over till it's over. Right now it is difficult to quantify the losses incurred from the crisis. Sethaput wrote that the US sub-prime rates were now being reset at a higher level to reflect the risks. This repricing will not peak until March 2008. In the first quarter of this year, deliquencies of sub-prime loans reached 13.8 per cent as home-buyers with poor credit backgrounds could not afford to continue to pay their instalments.

This reflected the US economic slowdown and also the higher interest burden the home-buyers had to bear.

With this correction going on, it is estimated that US institutions will lose about $200 billion from the collapse of the sub-prime loan market. There are now about 5.9 million sub-prime loans outstanding in the United States.

Between 1.4 million and 2 million are likely to lose their homes as a result of the repricing of the mortgage rates. President Bush's programme to tackle this crisis will not have not a big impact because it will help refinance homes for only 80,000 families.

"The sub-prime-related problems are not likely to be resolved any time soon," Sethaput wrote. "The increase in delinquencies will lead to more credit-rating downgrades with the possibility of more forced selling by institutions.

A large part of the problem is that with securitisation, no one really knows who are facing sub-prime exposure and where the problems might be lurking. Bad news will therefore emerge gradually rather than all in one go."