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Published on March 22, 2008

In addition to Bear Sterns, a major US securities firm taken over by JP Morgan Chase last week, there will likely be more casualties as the crisis deepens.

At the heart of the problem is the securitisation of inferior US housing loans, as these assets were previously re-packaged for re-sale to US and other investors around the world. Given high interest rates of 8-9 per cent per annum, or even higher, these so-called CDOs, or collateralised debt obligations, were snapped up by many institutional as well as individual investors, including big hedge funds.

However, many of the sub-prime mortgage borrowers, mostly lower middle-class and poor Americans, later started to default on their loan payments due to their low creditworthiness. This resulted in the onset of a catastrophic chain effect.

To begin with, holders of these CDOs, which have a maturity of 5-10 years, decided to rush to get out of the market for fear of losing more money amid the increasing rate of home foreclosures.

Foreclosures generally mean that investors will lose a significant value of their underlying assets. In other words, the damage didn't stop at the original lending banks, which would have been the case if there was no securitisation; the capital market has also been hit hard by the sub-prime woes. In this context, the problem has triggered a liquidity crisis in the capital market, as hundreds of major US financial institutions are exposed to these high-risk assets.

Now, the market has only sellers, and few buyers, if any at all.

In short, the crisis has spread from the US mortgage market to the US capital market, after which the US financial sector could be hit. This could be followed by a hit on the real sector of the US economy and, later on, the world economy.

The overall damage of this sub-prime crisis is estimated to top US$500 billion, of which only about US$200 billion has been observed so far. It seems the US authorities have acted too late in dealing with this, as strong measures should have been taken as early as two years ago.

Given the depth of this crisis, it could take up to three years to sort out the whole mess before there is a solid recovery. In the process, US consumer appetite, for instance, could dive, resulting in fewer Thai exports to the US market - not to mention four Thai banks that were directly exposed to CDOs.

So far, the consensus is that there has been no de-coupling of Asian and US economies, despite the rapid rise of the Chinese and Indian economies as counterweights to US economic power. Hence, the economic health of Thailand and other Asian countries will still depend a lot on the US - and the outlook isn't pretty.

Nophakhun Limsamarnphun

nop1122@yahoo.com

The Nation