Beyond everyone’s forecast, European economies are now the biggest sufferers of the US subprime crisis
As a matter of fact it is estimated that repossessions have already doubled in UK and some other European Markets. The potential credit losses will by pessimistic calculations lower the aggregate capital adequacy ratio at European banks by about 150 bps.
IMF’s Global Financial Stability Report precisely brings out the fact that domestic banks in Eastern Europe have built large negative net foreign positions as credit growth has outpaced domestic deposits. Given the size of bank losses and disruptions in bank funding and securitisation markets, Europe certainly seems to be at a greater risk. It is not only UK or Eastern Europe, which is witnessing renewed symptoms of the crisis. Italy’s economy has started shrinking, its GDP went down by 0.3% quarter-on-quarter in April-June 2008. German economy too shrank by 0.5% during the same period. Moreover, the whole Euro zone economy shrank 0.2% during Q2 2008.
After this if the emerging economies, which have been so far resilient to the shock, do not jump into brainstorming to find a way out, very soon they will find themselves in the shoes of the European economies. Agrees Olsen, “Asian economies have been affected both directly, through their holdings of US mortgage-backed securities, and indirectly, via changes in investment and consumption patterns.” As a matter of fact the declining growth in US and Europe will have a negative impact on the exports of the emerging economies. In fact depending on the trade and financial links with the US, a 1% decline in US growth will lead to a 0.5-1% decline in the growth of emerging economies. Thus, instead of just waiting and allowing things to happen on their own, developing countries must find their way out of the ‘infectious’ economic crisis. Else, looking at the developing nations Jean-Claude Trichet, President, ECB will soon be heard saying, “I know what you thought...”
As a matter of fact it is estimated that repossessions have already doubled in UK and some other European Markets. The potential credit losses will by pessimistic calculations lower the aggregate capital adequacy ratio at European banks by about 150 bps.
IMF’s Global Financial Stability Report precisely brings out the fact that domestic banks in Eastern Europe have built large negative net foreign positions as credit growth has outpaced domestic deposits. Given the size of bank losses and disruptions in bank funding and securitisation markets, Europe certainly seems to be at a greater risk. It is not only UK or Eastern Europe, which is witnessing renewed symptoms of the crisis. Italy’s economy has started shrinking, its GDP went down by 0.3% quarter-on-quarter in April-June 2008. German economy too shrank by 0.5% during the same period. Moreover, the whole Euro zone economy shrank 0.2% during Q2 2008.
After this if the emerging economies, which have been so far resilient to the shock, do not jump into brainstorming to find a way out, very soon they will find themselves in the shoes of the European economies. Agrees Olsen, “Asian economies have been affected both directly, through their holdings of US mortgage-backed securities, and indirectly, via changes in investment and consumption patterns.” As a matter of fact the declining growth in US and Europe will have a negative impact on the exports of the emerging economies. In fact depending on the trade and financial links with the US, a 1% decline in US growth will lead to a 0.5-1% decline in the growth of emerging economies. Thus, instead of just waiting and allowing things to happen on their own, developing countries must find their way out of the ‘infectious’ economic crisis. Else, looking at the developing nations Jean-Claude Trichet, President, ECB will soon be heard saying, “I know what you thought...”
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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