More financial turmoil to come

August 8, 2008
More financial turmoil to come
One year later, the US sub-prime crisis is spreading to Asia
By Bryan Lee, Economics Correspondent

Nobody seems any wiser as to how long the financial turmoil will last
and what the final bill will be. But the worst may be yet to come as
the pain is starting to spread to the wider economy, which is where
the real devastation begins.

FOR many investors, it has been the longest 12 months in their lives,
but the first anniversary of the sub-prime crisis tomorrow will bring
little in the way of relief.
The signs point to more turmoil, more billion-dollar write-offs and
more stock market volatility. But most worryingly, they indicate the
pain is moving from Wall Street and other financial centres to street
level and the everyday economy in the United States, Europe - and
Asia.

Forget the decoupling theory - the one that said Asia's booming
economies would shield us from the West's woes.

While the region has been largely spared so far, it suddenly finds
itself in the path of the runaway train.

Unemployment in the US is rising while tighter lending conditions
mean less money in the hands of shopaholic American consumers, the
chief driver of the world economy with their craving for goods. That
is already showing up in China and India where their powerhouse
economies look to be starting to slow.

The ripple effect of that to Singapore and other regional economies
could soon come clear. Asia's policymakers also have a perilous
balancing act: trying to combat inflation caused by sky-high oil and
commodity prices while not stifling growth.

'All the arguments for Asia decoupling from the West are unravelling
before our eyes,' said Citigroup economist Kit Wei Zheng. Asia's
fate, in fact, rests largely on how the West comes out of the crisis.

The damage is immense: Banks have written off almost US$500 billion
(S$685 billion), stock markets have plunged while central banks have
worked hard to keep credit markets going.

US banks have been going to the wall, including mortgage giant
IndyMac and Wall Street bruiser Bear Stearns, yet financial
institutions continue to reel from the credit crunch.

Banks and investors are reluctant to lend to each other as they fear
more red ink from sub-prime-related investments.

Despite billions pumped into money markets by US and European central
banks, credit conditions have improved little since Aug 9 last year.

That was the day the European Central Bank injected 95 billion euros
(S$203 billion) into credit markets to keep them from complete
collapse. The unprecedented amount was bigger than all the funds the
US Federal Reserve pumped in after the terrorist attacks on Sept 11,
2001.

'The crisis is definitely not over and volatility may move from the
US and Europe to Australia and New Zealand, where their housing
markets are starting to wobble,' said OCBC Bank economist Selena
Ling. 'If you go by the International Monetary Fund's sub-prime loss
estimate of US$1 trillion, then we're barely halfway through this
crisis.'

Mr David Cohen of Action Economics in Singapore added: 'There's a
continuing cloud over housing-related finance in the US. The hope is
that by the middle of next year, we can start to see a turnaround.'

While fears of a systemic global financial meltdown have largely
abated, economists warned the crisis is beginning to impinge on the
real economy in the US.

'Credit conditions will tighten (in the US), not just for housing,
but for credit cards, car loans and even corporate loans,' said Ms
Ling. 'This will hurt consumer spending and capital expenditure by
corporations, which will (reduce) hiring, further hurting consumers.
Looking at the past few recessions, unemployment peaks only two to
three years after the start of the crisis.'

So far, the US economy has been relatively resilient, while corporate
balance sheets are in fairly good shape.

Asia, for its part, has had China and India to help keep it chugging
along.

But economists wonder if the resilience is temporary and it is just a
matter of time before things really slow down.

Mr Cohen sees a slump but not a crash: 'Asian economies will slow
but, for the moment, they are unlikely to see a sharp contraction.'