Download Mortgage crisis in the US, economic slowdown in Europe

Report 3/2007 -Editorial
Marianne Kager
Mortgage crisis in the US,
economic slowdown in Europe
The reader may ask what the mortgage crisis in the US
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has to do with economic developments in Europe.
The securitisation of mortgage loans moreover
prompted international investors to enter this market.
Investment banks, hedge funds etc. acquired such se-
The answer is that the current slowdown in economic
curities and subsequently again sold them to other insti-
growth has (so far) little to do with the US subprime crisis.
tutional investors and to private investors. That is the
Nevertheless, the subprime crisis clearly shows that in a
major difference to the savings and loans crisis in the
world of global financial markets, crises can no longer be
early 90s.
viewed as isolated phenomena.
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put a large proportion of the US current account deficit,
Although expedited and accentuated by the subprime cri-
and consequently the strong growth of consumption in
sis, the cooling of the European economy is not totally
the US in recent years, in a macroeconomic context.
unexpected. Investment and industrial output are weaker
(due to cyclical factors). The European economic cycle,
How are the conduits of the US subprime crisis to be
like that of Austria, could only have continued if private
consumption were to have grown at a more dynamic rate.
evaluated for the European economy?
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There are however no signs of any acceleration in con-
has negative implications for the US dollar, and therefore also for European exports.
What transmission mechanisms cause a crisis in the US
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tion of funds by the ECB and the central banks (e.g. the
This is not the US's first mortgage crisis. There are
Bank of England). The reason for the liquidity bottle-
some who will recall the savings and loans crisis at the
neck was the uncertainty of banks as regards who had
beginning of the 90s, which created problems for Amer-
invested in the securities, and how much. This in turn
ica's savings banks. That crisis was limited to America.
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caused interest rates on the interbank market to surge,
Why is the situation different today, and what actually
and made corporate funding more expensive.
triggered the subprime crisis in the US?
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In the US mortgage market there are about US$ 10
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cannot be ruled out. This may adversely affect con-
trillion of this amount is refinanced through securities,
struction activity.
with asset-backed securities accounting for some US$
the subprime sector.
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The IMF reported that in 2003, the bulk of mortgage
financings had a "prime confirming" status, and that the
percentage had fallen to 36% in 2006, while 21% had a
subprime status and 25% were rated Alt-A, i.e. low
credit ratings.
Bank Austria Creditanstalt Economics and Market Analysis
A correction of Europe's real estate markets, especially
those which had seen high growth rates in recent years,
trillion in home loans outstanding. Approximately US$ 6
2 trillion. Most of these asset backed securities are in
Liquidity in the European market was sometimes tight, a
situation that could only be eased by a massive injec-
economic growth?
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The subprime crisis has frightened off international investors and kept them away from the US market. This
sumer demand.
mortgage market to have a negative impact on Europe's
The sale of the securities to foreign investors naturally
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And finally, the subprime crisis is instructive for the supervisory authorities. National supervision on its own is
insufficient in a global, liberal financial system. Furthermore, the question as to who – besides banks and securities firms – is to be supervised needs to be reviewed. This applies to originators, rating companies
and hedge funds.