Tuesday, July 5, 2011
Subprime Loans and Crisis Management Part.3
In addition to the survival of the funds involved, the correction of the subprime loans crisis in the United States require "the finest tuning" in order not to fall from bad to worse:
* A massive intervention on behalf of borrowers bail out banks would prevent restoring forces to play their role in the crisis and resume cyclically in a few years.
* Conversely, an inadequate response - but allowing to clear the financial sector by eliminating litigation - would have a major impact on the U.S. economy, the real estate sector (in a city or 20% of loans are subprime, a price collapse would contaminate all borrowers), but also on consumption, the main engine of growth.
The consequences of this crisis will be dramatic for the hundreds of thousands of U.S. borrowers who find themselves in a situation of bankruptcy. The impact should also be very important on the U.S. economy, leading to a likely recession. The direct impact on the global economy has yet to understand the difficulties encountered in three areas.
(I) First of all in asset management systems credit derivatives played their part in spreading the risk. The investors then faced most of the losses.
(Ii) Then the current problems on the short-term liquidity should not continue, the central banks play their role as lender of last resort, and investors rediscovering the charm of the short-term investments.
(Iii) Finally, the credit business knows the beginning of a "flight to quality" that can only be healthy; all observers have denounced the excesses for several months, particularly in terms of investment funds whose growth should slow. You still have to remember that the currently observed spreads are still well below what they were from 2000 to 2001.
Nevertheless it is expected, in continental Europe, that governments use the crisis to demand an additional transparency on Asset Management. However, these trades have become so technical that it is difficult to make them accessible to the uninitiated to measure the risks actually incurred by the funds...