$100bn – the cost of the American subprime collapse

08-04-2008

$100bn – the cost of the American subprime collapse
The collapse of the subprime mortgage market in the US will cost the world economy $945 billion (£472 billion), the International Monetary Fund (IMF) has said.

The body's biannual report found losses directly from repossessions and nose diving US house prices would lead to losses of $565 billion (£282 billion), while losses from investment products linked to the subprime mortgages will push the cost higher.

Jaime Caruana, head of the IMF's monetary and capital markets department, said: "Financial markets remain under considerable stress because of a combination of three factors.

"First, the balance sheets of financial institutions have weakened; second, the de-leveraging process continues and asset prices continue to fall; and, finally, the macroeconomic environment is more challenging because of the weakening global growth."

The report shows the US remains the epicentre for the crisis, but financial institutions in other countries are also being hit – part due to "a collective failure to appreciate the extent of leverage taken on by a wide range of institutions", excessive risk-taking and weak underwriting unchecked by regulation, and the transfer of risks off bank balance sheets, which are now starting to materialize.

The report started: "Notwithstanding unprecedented intervention by major central banks, financial markets remain under considerable strain, now compounded by a more worrisome macroeconomic environment, weakly capitalized institutions, and broad-based de-leveraging.

"In sum, the global financial system has undoubtedly come under increasing strains."

The report also called on global policymakers to take immediate steps to mitigate the risks of an "even more wrenching adjustment", including by preparing emergency plans.

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