New debt crisis is on the cards - literally
December 3, 2007
By Ethel Hazelhurst
A s we glide into the gift-giving, high-spending holiday season, another spectre is surfacing in global financial markets: bad credit card debt. People are asking: is this the new subprime?
The UK's Evening Standard reported that "$415 billion [R2.8 trillion] of US credit card debt could be sucked into the void created by the credit crunch, sending further waves of destruction through global markets".
The publication may have been overstating the case, considering the figure represents the value of the entire US securitised credit card debt on September 1. But it was making an important point.
It seems US consumers, who had previously been borrowing against the value of their properties, resorted to other forms of borrowing when they had exhausted their access to mortgage credit. And banks, which no longer found mortgage lending lucrative, encouraged credit card consumers with lax lending standards.
Like subprime mortgages, these loans were bundled and sold off round the world. Now there is concern over debt defaults.
HSBC, Britain's biggest bank, gave a sign last week when it warned that mortgage debt problems were spilling over into other types of business, with write-downs on mainly car loans and credit card debt in the third quarter.
Meanwhile the mortgage crisis continued to claim casualties. Last week Zoe Cruz, co-president of Morgan Stanley, got the push, three weeks after the firm disclosed $3.7 billion of losses on mortgage-related securities at the division she oversaw. Her departure followed that of Bear Stearns president Warren Spector, Merrill Lynch chief executive Stan O'Neal and Citigroup chief Charles Prince.
The BBC reported on Friday that "a wave of foreclosures is about to sweep the US" and warned it could lead to further turmoil in financial institutions, which collectively own $1 trillion worth of sub-prime debt.
These problems still seem remote to South Africans. Though consumers are feeling the pain of interest rate increases, banks have not been issuing the equivalent of subprime credit. And, unlike US low-end property prices, the lower end of the local market is thriving.
John Loos, a property strategist at First National Bank, says "affordable area" properties - those below R250 000 - "outshone" all other segments of the market. Hot spots include townships like Soweto, which are in the early stages of "dramatic structural change". So the country seems safe from a low-end mortgage crisis.
But local markets are suffering collateral damage from the uncertainty in global financial markets. The cost of funding is rising as investors demand higher risk premiums. And, like other stock markets, the JSE is looking decidedly off balance.
The rand is performing poorly. Bloomberg reported on Friday that it had dropped 4 percent against the dollar last month, its biggest decline since September 2006, following two months of gains - "as global credit market concerns eroded demand for riskier, emerging market assets".
In the US, the Federal Reserve is probably riding to the rescue. On Thursday night, chairman Ben Bernanke followed up on earlier hints by vice-chairman Donald Kohn that the Fed would cut its target rate further. He implied that the balance between risks to the economy and inflation had shifted towards the former.
The comment put the bounce back into global stock markets - but the effect will be temporary. The truth is, until dud debt has worked its way through the system, none of us will sleep easily at night.
|
|
