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SCALE-BACK IN LOANS – US could face $3 trillion lending shock: Goldman

LONDON – THE impact of the United States mortgage market crisis on the underlying economy could be ‘dramatic’ as leveraged investors may need to scale back lending by up to US$2 trillion (S$2.9 trillion), according to investment bank Goldman Sachs.

In a report on Thursday, Goldman’s chief US economist Jan Hatzius said a ‘back-of-the-envelope’ estimate of credit losses on outstanding mortgages, based on past default experience, was around US$400 billion. But unlike stock-market losses, which are typically absorbed by long-term investors, this mortgagerelated hit is mostly borne by leveraged investors such as banks, broker-dealers, hedge funds and government-sponsored enterprises.

As these investors depend on loans, they react to losses by actively cutting back lending to keep capital ratios from falling. A bank targeting a constant capital ratio of 10 per cent, for example, would need to shrink its balance by US$10 for every US$1 in losses.

‘The macroeconomic consequences could be quite dramatic,’ Mr Hatzius said. ‘If leveraged investors see US $200 billion of the US$400 billion aggregate credit loss, they might need to scale back their lending by US$2 trillion. This is a large shock.’

He added that the number equates to 7 per cent of total debt owed by US non-financial sectors.

 

Source: REUTERS (The Straits Times 17 Nov 07)

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