Ongoing effects of the credit crisis spread

24 October 2007
The credit crisis is continuing to ripple throughout the global economy as Libor (the London Interbank Offered Rate) rates remain high, Russia and Spain feel its effects, and a US lender practices damage control by providing cheaper loans.

Despite hopes for a falling Libor rate in line with expectations of a lower interest rate in the US, the Libor has seen drops in the dollar, sterling, and euro market from recent highs, but rates have remained elevated above historical levels. One of the reasons for this is suspected to be the $100 billion superfund from some of America’s largest banks intended to revive the market.

Russia felt the effects of the crisis yesterday, as the state bank announced plans to inject billions of pounds into the financial system in order to avert a potential liquidity crisis; many Russian institutions experienced lost access to foreign credit when the economy suffered an exodus of capital as foreign investors withdrew their money when the bad credit mortgage crisis broke in August.

While sub prime crisis fall-out in Spain has been minimal, the subsequent effect on the credit market has been more noticeable, as it has stunted the flow of leveraged buy-outs by private equity groups, because they no longer have the same faith in the market.

In an attempt to prevent further damage to the US economy and housing market, its biggest mortgage provider, Countrywide Financial, said yesterday that it will provide cheaper loans and refinancing options to 82,000 customers whose $16 billion of sub prime mortgages will be facing interest rate resets by the end of the year; it will assist those who are not yet facing foreclosure but are vulnerable to the impending rate resets.

This is as a direct result of the growing number of foreclosures in the US – last week, Countrywide advertised 13,000 properties for sale, compared to 5,000 at the beginning of 2007, which are leaving the lender further exposed to the wrath of the crisis as it faces falling house prices and the legal administrative costs foreclosures entail.

Countrywide is taking responsibility for the its part in causing the crisis by granting mortgages to people with low incomes and bad credit histories, deals that were granted while the rates were looking good but which became sitting ducks for default payments when rates leapt up after the first few months. The move has also been motivated by the 69,000 Americans who have filed for a form of bankruptcy which protects them from being evicted from their homes.

However, it is not all doom and gloom – either for the US or global economy – as international sales growth is providing buoyancy for the US groups and is softening the blow of the sub prime crisis and its aftershocks (a drop in housing and liquidity). Additionally, the first public sale of as mortgage-backed bond has been made by Dutch bank GMAC RFC Nederland, which has been welcomed by European mortgage providers and banks as it shows there is light at the end of the sub prime tunnel.

©Fair Investment Company Ltd