Singapore PM Lee says S’pore’s financial systems sound, economy competitive

Singapore PM Lee says S’pore’s financial systems sound, economy competitive

By S Ramesh,

SINGAPORE: Singapore’s Prime Minister Lee Hsien Loong on Friday said the country’s financial system is sound, and its economy remains competitive despite slowing down.

Mr Lee was speaking at a conference of overseas Indians held in Singapore.

He cautioned that with the ongoing financial storm, Asian countries must prepare for a rough ride at least over the next year and quite possibly longer.

Mr Lee said it will take time to subside fear and panic gripping financial markets, and the problems facing financial institutions in the US and Europe are complex and grave.

Said the Prime Minister: “The trust and confidence between banks, which lie at the heart of finance intermediation, will take time to restore. The crisis in the financial system will dampen consumption and investment in the developed countries and affect growth all over the world.”

While Asian banks have avoided the problems afflicting the US and European banks, globalisation has meant that Asian equity markets have been hit by the events in Wall Street.

As a result, Mr Lee noted that Asian countries cannot avoid the impact of weakening US, European and Japanese economies.

For Singapore, Mr Lee noted that over the last few years which saw good economical conditions, the country had pressed on with upgrading and diversifying the economy.

“This will mean new and better jobs, even if some old ones are lost,” he said. “The momentum from projects that we have secured will help to see us through this storm.”

He added that Singapore’s strategy of growing with Asia also remains valid as the country believes Asia’s dynamism will endure.

One way is by linking up with India through its diaspora which numbers 25 million around the world.

Their members have helped to integrate India into the Asia-Pacific region and made a critical contribution to the Indian economy by remitting US$27 billion back to India each year.

- CNA/yb

Source : Channel NewsAsia - 10 Oct 2008

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Parkway Life Reit raises rentals in line with CPI

Parkway Life Reit raises rentals in line with CPI

By CHEN HUIFEN

PARKWAY Life Reit’s manager says it has raised the rent at Singapore hospitals under its portfolio by some 6.25 per cent, in line with the rise of the consumer price index (CPI).

Parkway Trust Management, manager of the Reit, said the revised rates will be effective from Aug 23 this year to Aug 22 next.

The new rental rates are based on the CPI+1 per cent formula. ‘Based on the information obtained from the Singapore Department of Statistics, the CPI for the first year of the term has been agreed at 5.25 per cent,’ Parkway Trust Management said in a statement.

About 80 per cent of Parkway Life Reit’s revenues come from its Singapore hospitals, consisting of Mount Elizabeth Hospital, Gleneagles Hospital, East Shore Hospital as well as 40 medical suites in Mount Elizabeth Medical Centre and the Gleneagles Medical Centre.

‘With the Singapore hospital properties as the main contributor to the performance of PREIT, the long leases and annual rent review pegged to CPI+1 per cent ensure there is downside protection and that our unit holders continue to enjoy stable and sustainable returns,’ said Justine Wingrove, chief executive officer of Parkway Trust Management.

From Aug 23 last year, the day it was listed, to June 30 this year, total gross rental revenue from the Singapore hospital properties in its portfolio was $40.75 million.

Apart from the Singapore hospitals, Parkway Life Reit also owns nine nursing homes and a pharmaceutical products distributing and manufacturing facility, all in Japan. It continues to eye assets in China, India, Japan, Malaysia, Singapore, Australia and Thailand for acquisition.

On Sept 30, the Reit’s portfolio size stood at $1 billion. Shares of Parkway Life Reit ended down 2 cents at 90 cents yesterday.

Source : Business Times - 10 Oct 2008

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Q3 property investment sales plunge 79% to $1.1b

Q3 property investment sales plunge 79% to $1.1b

Activity set to stay low for rest of ‘08; asset pricing now more ‘realistic’: DTZ

By ARTHUR SIM

INVESTMENT sales in the third quarter totalled just $1.1 billion, a dizzy 79 per cent slide from the second quarter, according to DTZ. And most deals in Q3 were small, at less than $100 million each, due to ‘credit tightening’.

Investment activity is expected to stay low for at least the rest of this year. But DTZ senior director (investment advisory services and auction) Shaun Poh said: ‘Assets are now priced more realistically and there are funds looking for opportunistic purchases, in particular distress sales.’

Still, he said that deals are likely to be small, at less than $200 million, and mostly from private equity.

In Q3, Kuwait Finance House acquired 36 apartments at Goodwood Residences for about $2,800 per square foot.

The retail property market also slowed in Q3. ‘Gross fixed rents remained unchanged for three consecutive quarters, a sign of a peaking market,’ DTZ said.

Average prime first-storey monthly rents came to $42.40 psf in Orchard/ Scotts Road, $27.10 psf in other city areas and $33.70 psf in suburban areas.

DTZ associate director Anna Lee said that retail property prices and rents would come under pressure in 2009 when there is a spike in potential supply. ‘For the rest of 2008, rents are expected to hold firm with little new supply and Christmas around the corner.’

Separately, CB Richard Ellis (CBRE) said that rents for factories and warehouses edged up or stayed flat in Q3.

‘The bright spot was the high-tech sector, which showed a strong 9.5 per cent quarter-on-quarter increase in monthly rent,’ it said.

Monthly rent for high-tech space increased 9.5 per cent from Q2 to $3.45 psf in Q3, driven by rising numbers of qualifying office tenants.

‘An active pre-letting market for business park space was observed, especially among financial institutions,’ said CBRE.

The average monthly rent for factory space rose 3.2 per cent from Q2 to $1.60 psf for ground-floor units and 3.8 per cent to $1.35 psf for upper-floor units. The average monthly rent for warehouses stayed flat at $1.55 psf and $1.25 psf respectively for ground and upper-floor units.

The average capital value of 60-year leasehold strata-title factory units edged up about 2.3 per cent from Q2 to $309 psf and $225 psf respectively for ground and upper-floor units. The average capital value of freehold warehouses held firm during at $458 psf for ground-floor units and $401 psf for upper-floor units.

CBRE director for industrial and logistics services Bernard Goh said: ‘While rents for factories and warehouses are not expected to show significant movements, high-tech and business park space is expected to continue on a moderate upward trend.’

Source : Business Times - 10 Oct 2008

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Economists look into ‘09 and stare into more gloom

Economists look into ‘09 and stare into more gloom

SMEs warned of possible contraction; some predict easier monetary policy

By TEH SHI NING

(SINGAPORE) Expect the global downturn to hit Singapore hard, as GDP growth in Q4 and 2009 weakens, economists said at a Singapore Business Federation seminar yesterday.

They also warned SME managers of the worst-case possibility of a contraction next year.

Some predicted an easing of monetary policy allowing the Singapore dollar to depreciate. They were speaking ahead of two key announcements today - advance GDP data for the third quarter, and an exchange rate review from the Monetary Authority of Singapore (MAS).

‘This downturn is unlike previous ones,’ said CIMB-GK economist Song Seng Wun.

‘It shouldn’t be compared to the Asian financial crisis or the dotcom bubble, where there were still pockets of growth. What we now see is a synchronised slowdown across the world,’ he said.

His base case forecast for GDP growth is 2.5 per cent for this year, and 0 to 2 per cent for 2009.

Anticipating that accelerated fiscal spending takes time to work its way through the economy, whereas falling demand hits headline GDP rates far quicker, Mr Song’s worst case projection for 2009 is a negative 3 to 5 per cent in GDP growth.

Slowed growth and tapering inflation has led many to expect MAS to shift to at least a neutral stance, from the hawkish policy adopted in April to curb inflation.

OCBC economist Selena Ling said, ‘The SGD has been trading at the lower end of the band, so there’s actually room for the MAS to re-centre lower.’

This ‘double-edged sword’ though would lead to an interest rate rise. ‘There is no lack of liquidity yet, though I think MAS will likely inject cash to ensure the interest rate doesn’t surge excessively,’ she said.

Mr Song added that Singapore’s relatively strong corporate sector, the government’s fiscal surplus and consumers who are not heavily in debt are favourable silver linings in these ‘very trying times’.

Also, while job creation will slow, employment is unlikely to fall sharply with the integrated resorts contributing jobs, and the relative resilience of the construction sector serving to cushion, though not offset, recessionary effects.

Although most SMEs at yesterday’s seminar said banks’ tightened lending had not hit them yet, Singapore Manufacturers’ Federation president Renny Yeo said this will likely be more keenly felt when the renewal of leases for their facilities comes round.

Mr Song said the fundamental question of how to restore confidence remains. ‘We can cut interest rates to zero but if banks refuse to lend, it doesn’t solve the problem.’

Source : Business Times - 10 Oct 2008

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Shares rebound on Asian rate cuts

Shares rebound on Asian rate cuts

Interbank lending rates worldwide continue to climb

By CONRAD TAN

(SINGAPORE) Stocks in parts of Asia rebounded yesterday, after central banks in the region cut interest rates in a show of unity with their counterparts in the West.

Hong Kong, China, South Korea and Taiwan reduced official lending rates in a bid to bring down borrowing costs for banks and other businesses amid a darkening outlook for the global economy.

A report in The New York Times that the US government is planning to inject new capital directly into banks also raised hopes that the move would restore some trust between banks that have effectively stopped lending to one another for fear that the borrower might fail.

The Straits Times Index was the biggest gainer in the region, ending 3.4 per cent higher and recouping some of the losses suffered the previous day, when it plunged 6.6 per cent.

In Hong Kong, the Hang Seng Index rose 3.3 per cent after the city’s monetary authority cut the key lending rate by half a percentage point to 2 per cent - the second time this week it tried to lower borrowing costs. On Wednesday, the Hang Seng plummeted 8.2 per cent to its lowest level in more than two years.

China’s central bank cut interest rates by 0.27 percentage point late on Wednesday, and reduced the proportion of deposits that banks have to hold in reserve by half a percentage point, effectively making it easier for banks to lend money.

Share indices in China still ended about one per cent lower yesterday after giving up earlier gains.

In South Korea, the Kospi index finished 0.6 per cent higher, after the central bank reduced its benchmark interest rate to 5 per cent from 5.25 per cent - the first cut in four years.

The move by Asian central banks to lower interest rates followed coordinated rate cuts of half a percentage point on Wednesday by central banks in the United States, UK, euro zone, Canada, Switzerland and Sweden.

Japan’s central bank said it supported the move by its counterparts, but it did not cut its own key interest rate, which is already near zero at just 0.5 per cent. Yesterday, the Nikkei-225 index ended 0.5 per cent lower, after losing earlier gains. The stock benchmark dropped 9.4 per cent on Wednesday - its biggest one-day fall since the crash of October 1987.

In Indonesia, share trading remained suspended after Wednesday’s plunge of 10.4 per cent in the main stock index.

Other major indices in Asia ended mixed, with small gains or losses compared to the large swings earlier in the week.

Shares in the US seesawed wildly on Wednesday before ending lower for the fifth straight day, driving indices that track stock market volatility there to record highs.

Despite the central banks’ show of unity over the past two days, interbank lending rates worldwide remained stubbornly high yesterday, raising doubts about the short-term effectiveness of the official rate cuts in getting banks to resume lending to one another.

The three-month US-dollar London interbank offered rate or Libor, the global benchmark used to price vast amounts of bank loans and debt securities worldwide, rose to 4.75 per cent yesterday, its highest since last December.

The Libor for overnight US-dollar loans fell slightly to 5.09 per cent, still far above the US Federal Reserve’s latest official target of 1.5 per cent for interbank lending - suggesting that there remains deep mistrust between financial institutions.

Hong Kong’s three-month interbank offered rate rose to 4.4 per cent, the highest since last October.

Here, the overnight Singapore interbank offered rate or Sibor for US-dollar loans rose to 4.75 per cent from 4.36 per cent on Wednesday. The three-month US-dollar rate rose to 4.5 per cent, although the equivalent interbank rate for Sing dollar loans eased.

In the US, the market for commercial paper - a type of short-term debt issued by large companies there to fund their day-to-day operations - shrank for a fourth consecutive week for the week ended Wednesday, according to official data published yesterday, Reuters reported.

The global economy is headed for a ‘major downturn in the face of the most dangerous shock in mature financial markets since the 1930s’, the International Monetary Fund warned on Wednesday.

Source : Business Times - 10 Oct 2008

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US Treasury ready to invest in banks

US Treasury ready to invest in banks

Recapitalisation addresses major bottleneck, cheers markets; still, Morgan Stanley gets a drubbing

By ANDREW MARKS

NEW YORK CORRESPONDENT

A YEAR to the day that the US stock market hit its record high, the US government acknowledged that the financial bubble created by the risky lending strategies of its major financial institutions - which had propelled stocks to such lofty heights - has forced the Treasury Department to the unprecedented brink of directly investing in those very same banks.

Ticking financial time bomb: The US national debt is growing so large that the clock near Times Square in New York has run out of digits to show it. As a quick fix the clock’s minders have decided to drop the dollar sign from the figure, which showed that the national debt hit almost US$10.2 trillion on Wednesday.
This was to calm the global financial panic that has frozen credit markets throughout the world.

Despite the move, investors sold Morgan Stanley shares in mid-morning trading, sending it plunging as much as 25 per cent on the New York Stock Exchange (NYSE), amid escalating concerns that the company may be unable to weather the credit crisis. Reports attribute the drop also to short-sellers who returned to the market after the expiry of the ban yesterday.

The stock dropped US$3.97 to US$12.83 at 10:58am after falling as low as US$12.59 earlier. The New York-based company has lost 76 per cent of its value this year.

The government’s extraordinary measure, which would essentially mean at least a partial nationalisation of the country’s private banking system, comes as previous efforts to unlock the global credit markets have all but failed.

These include the US$700 billion rescue plan by the US to purchase non-performing loans, England’s US$500 billion plan to guarantee bank lending and help banks refinance their debt, and Wednesday’s unprecedented move by several of the world’s major central banks to coordinate interest rate cuts around the globe.

Treasury officials said that the just-passed US$700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take to take ownership positions in those banks.

Said Treasury Secretary Henry Paulson: ‘We will use all of the tools we’ve been given to maximum effectiveness, including strengthening the capitalisation of financial institutions of every size.’

The Federal Reserve also said it would grant insurance company AIG a loan of up to US$37.8 billion on top of the US$85 billion already lent out in September to keep the company from going bankrupt.

‘It’s an extraordinary idea that the greatest capitalist economy in the history of the world, which has survived the banking crisis of the Crash of 1929 and the Great Depression, must turn to the government to effectively take over one of the most basic functions of a private market - the banking system responsible for lending money to private businesses,’ said Joe Battipaglia, stockmarket strategist at Stifel Nicolaus.

‘But we are clearly in a crisis brought about by the illiquidity of hundreds of billions of dollars in assets held by so many banks that no one feels any one institution is immune from an outright failure - which means that there’s no one safe enough to do business with,’ Mr Battipaglia observed.

‘So if it takes the government directly investing in the banks to get the financial system unfrozen, I don’t see that there’s any other choice but to do it - and to do it fast,’ he added.

In the past month, the US government has already in effect nationalised three of the largest financial companies in the country, taking over the government- sponsored mortgage companies Fannie Mae and Freddie Mac, and lending insurer AIG US$85 billion in exchange for an ownership stake.

That there is overwhelming sentiment favouring this latest unprecedented measure by the government to prop up failing banks, reassure investors and avert an outright collapse of the financial system was evident on Wall Street yesterday.

Stocks opened higher on the NYSE on hopes that the government would take ownership stakes in many banks. The Dow Jones Industrials raced to a gain of more than 100 points within minutes of the opening bell and at 10am, the blue-chip index was still up by 50 points or 0.5 per cent, to 9,307.80. The broader S&P 500 index was up 3.4 points, or 0.35 per cent to 988.34, and the Nasdaq Composite index had gained 17 points or 0.99 per cent, to 1,757.50.

A report from IBM that it would meet its profit expectations for the third quarter was also serving as an early boost, but few traders expected to see the stock market move in a single, upwards direction yesterday, despite the renewed hopes that the Treasury Department’s direct investment plan seemed to have awakened amongst investors looking for an end to the massive sell-off.

‘Just look at what happened yesterday if you want an idea of what to expect today, and for the next several sessions, for that matter,’ said Phil LaPonte, an equity trader at Harrelson Capital Management, referring to the extreme volatility that marked Wednesday’s trading.

The Dow opened with a 150-point rally, then went on to see-saw between gains and declines until a 316-point slump in the final minutes of trading wiped out what had appeared to be a positive conclusion to the day.

Source : Straits Times - 10 Oct 2008

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Singapore Hotel site draws just one bidder

Singapore Hotel site draws just one bidder

By Joyce Teo

A TENDER for a hotel site on Kallang Road has attracted just one bidder, who has lodged the minimum price allowed under the process.
Tenders typically attract prices above the minimum bid but on this occasion Citywide Land’s $51 million offer was right at the limit for the plot next to Lavender MRT station.

‘It’s a reflection of the highly uncertain market environment,’ said Knight Frank’s director of research and consultancy, Mr Nicholas Mak. ‘And some developers may find it challenging to get funding for land purchases.’

The 99-year leasehold site is on the reserve list and was launched after an unnamed firm applied on Aug 1 for it to be put up for sale.

In the application, it had to commit to bid at a minimum price acceptable to the State, which was $51 million.

The bid from Citywide Land was right on the money at $249.6 per square foot per plot ratio for the 4,219 sq m site.

The Urban Redevelopment Authority said it will decide on the awarding of the tender after evaluating the bid.

When the application was made in August, Mr Mak had expected bids of between $400 to $450 psf, although he added that poor market sentiment or lower-than-expected visitor arrival numbers could bring bids down to $330 psf.

An unnamed consultant had reportedly expressed surprise that the site was even triggered given global economic concerns and soaring construction costs. Since then, the economic climate has worsened further.

The site has a maximum allowed gross floor area of 18,986 sq m, which could accommodate a hotel of up to 25 storeys. This means some of the rooms will have views of Kallang River, said Mr Mak. ‘This is a good hotel site. When the situation improves, the bidder will be seen as very lucky,’ he added.

Fellow consultant Ku Swee Yong, director of marketing and business development at Savills Singapore, said the low bid is not surprising as construction costs are still high.

‘To build a 3 1/2-star hotel, they have to bid low,’ he said.

Citywide Land is an unfamiliar name in the property market here.

SIGN OF THE TIMES
‘It’s a reflection of the highly uncertain market environment. And some developers may find it challenging to get funding for land purchases.’

Mr Nicholas Mak, Knight Frank’s director of research and consultancy, on the single, low bid for the Kallang Road site

Source : Straits Times - 10 Oct 2008

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Global crisis may hit Singapore economy hard

Global crisis may hit Singapore economy hard 

Lee Yi Shyan sees new opportunities as experts forecast tough times 

By Gabriel Chen 

ECONOMISTS have painted a grim picture of the economic outlook here, warning that Singapore will not be unscathed by the financial carnage sweeping rapidly across the United States and Europe.
‘This downturn will be unlike previous downturns,’ CIMB-GK economist Song Seng Wun told about 100 senior and middle-management staff of small businesses yesterday at a business outlook seminar organised by the Singapore Business Federation (SBF).

 
‘The private consumption slowdown in the US and Eurozone may have a significant knock-on impact on the rest of the world.’

Mr Song believes the expected sharp fall in global trade and financial flows could lead to Singapore’s worst economic performance ever.

He predicted that in the worst-case scenario, Singapore’s economic output could shrink between 3 per cent and 5 per cent next year from this year.

OCBC Bank economist Selena Ling was less pessimistic but maintained that the Government was likely to downgrade its official economic growth forecast of 4 per cent to 5 per cent for this year.

The Ministry of Trade and Industry releases its advance economic growth estimates for the third quarter today.

‘What we’re seeing now is that Asia is at an inflection point. Growth is slowing down,’ said Ms Ling, citing broad-based weakness in the manufacturing sector, weakness in electronics and lacklustre performances in the biomedical and pharmaceuticals segments.

In his speech yesterday, Mr Lee Yi Shyan, Minister of State for Trade and Industry, urged small businesses not to stop venturing abroad despite the economic slowdown.

‘These challenging economic times also provide new opportunities for Singapore companies to venture overseas to seek opportunities in emerging markets such as Latin America, the Middle East, Russia and Vietnam,’ Mr Lee said.

He added that there are still many areas where there are opportunities for collaboration, be it in agri-business, food and beverage, electronics, oil and gas, transport, logistics or infrastructure.

Yesterday’s event - the first of a series of quarterly SBF seminars on economic outlook and business sentiment - attracted representatives from diverse industries including travel, retail, logistics and engineering.

Among those present was PASR Technologies’ commercial director Max Collins, who said that the firm was more careful with expenses these days.

Previously, the firm would stock up on information technology equipment, but now it would just buy these gadgets to meet customer requirements.

‘I’ve a concern that the market will just…contract, and people will stop spending,’ he said solemnly.

Singapore Manufacturers’ Federation president Renny Yeo said that most of his 2,600 members do not have problems borrowing from banks now.

However, he hopes that come next year, when they need to renew their terms with the banks, the funding will not dry up.
REINING IN EXPENSES
‘I’ve a concern that the market will just… contract, and people will stop spending.’

PASR Technologies’ commercial director Max Collins, whose company is more careful with expenses these days

 
Source : Straits Times - 10 Oct 2008

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Working less than 35 hours a week? You’re a part-timer - Singapore

Working less than 35 hours a week? You’re a part-timer - Singapore

MOM agrees to tweak limit on working hours to protect full-time workers
 
By Kor Kian Beng 

THOSE who work fewer than 35 hours a week will soon be considered part-time workers, under changes to be made to the Employment Act.
This suggestion, made during a three-week public consultation on proposed amendments to the Act, has been accepted by the Ministry of Manpower (MOM).

Initially, MOM had proposed that part-timers be defined as those who work 35 hours or less, as opposed to the Act’s existing definition of under 30 hours.

It said: ‘In consultation with the tripartite partners, MOM agrees that if part- time employees are defined as those who work 35 hours or less, full-time employees on a five-day, seven-hour working arrangement may be re-classified as part-time employees and have their employment benefits pro-rated accordingly.

‘In view of this, the ministry would accept this proposal.’ It made the announcement on its website and that of the feedback unit Reach.

The reason for the original proposal is to coax more employers to offer part-time work and attract more women back to work.

This amendment is among 23 to be made to the Act, which covers about 1.4million workers. It provides them with basic employment benefits such as salary protection, minimum employment terms and dispute resolution. Senior managers, seamen, domestic workers and government employees are excluded.

In coming up with the amendments, MOM consulted the National Trades Union Congress and the Singapore National Employers’ Federation (SNEF).

Last month, the proposals were put out for public feedback. MOM received more than 70 written comments.

However, the ‘part-time worker’ suggestion was the only one it agreed with.

The decision was welcomed by Mr Koh Juan Kiat, executive director of the SNEF.

He said a sizeable proportion of full-time employees in, for instance, the cleaning and security sectors, is on a five-day, seven-hour work week.

‘Changing the definition will protect these workers,’ he said.

Agreeing, Mr Abdul Subhan Shamsul Hussein, president of the Food, Drinks and Allied Workers’ Union, said it would remove the possibility of rogue employers exploiting workers by re-classifying them as part-timers and cutting back on their employment benefits.

Among the reasons MOM gave for rejecting several of the other suggestions were: to avoid rigidity in the labour market and to maintain economic competitiveness.

Hence, it turned down such ideas as increasing the notice period for leaving a job, and tying paid annual leave and sick leave to a worker’s years of service.

Last amended in 1995, the Employment Act is being tweaked to keep pace with changes in the labour market.

Increasingly, shorter employment and contract workers are becoming more widespread, following the increase of outsourcing by companies.

The 23 proposed changes cover four areas: revising the coverage of the Act, reviewing employment standards and benefits, enhancing penalties and enforcement powers, and rationalising existing provisions and repealing the outdated.

The amendments will go before Parliament soon and will probably come into effect next year.

 
Source : Straits Times - 10 Oct 2008

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Europe’s banks have their own problems

Europe’s banks have their own problems 

Have a question on the financial crisis? Send it in and we’ll get it answered. Beginning today, The Straits Times consults economists and other experts to get answers to questions the man-in-the-street has been asking. 

TODAY’S QUESTION

Why are so many European banks in trouble and needing government help when the original source of the problem was the United States?

IT IS true that the source of the major global problems was US banks granting mortgages to vast numbers of US borrowers with almost no chance of paying them back. Wall Street then repackaged these bad loans in the form of complex investment instruments which were then sold all over the world.

But Europe has problems of its own.

Firstly, European banks also lent heavily to home buyers on the back of rising property markets in their home countries. Just as in the US, the housing bubble has burst and house prices are now falling. This erodes the value of mortgage collateral that banks hold on these housing loans and also increases the chance of default on mortgage loans by borrowers.

A recent Citibank report warned that while the US housing slump is in its second year, Europe’s is just beginning.

Second, in an interconnected global financial system, European banks were exposed to US sub-prime mortgages and other risky assets in Eastern Europe. An IMF report says European banks may have had close to three-quarters of the exposure to US sub-prime mortgages as US banks.

Finally, many European banks had become highly leveraged themselves. This means that the amount of debt they hold is much higher than the size of their assets. Some banks are leveraged as much as US investment banks, which have already fallen to a crisis of confidence.

If significant numbers of depositors decide to ask for their money, European banks may not have enough capital to pay. And with the current global credit freeze, they are finding it difficult to borrow from other banks, who are afraid to lend to each other for fear of not getting their money back.

In short, European banks are facing the same problems as the US. In past crises, Europe has always followed the US into recession, with a slight time lag. This time will be no different.

ROBIN CHAN

 
Source : Straits Times - 10 Oct 2008

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