Complete Property Market Updates of Singapore

April 30, 2008

Financial crisis severe but impact on Asia is less

Filed under: 1 — Propertymarketupdates @ 5:36 am

While US banks are badly hit, outlook is more optimistic for Asian, S’pore lenders

INFLATION may be the threat du jour to global economic health but the financial crisis that triggered the current slowdown remains a clear and present danger.

A Straits Times’ survey of six local head honchos in the financial and investment spheres found that they take a grave view of the ongoing financial crisis, but they expect a far smaller impact in Asia.

Comments last week from the Government of Singapore Investment Corp (GIC) were a stark reminder that many believe the world’s banking system has yet to emerge from what is widely regarded as its worst crisis in decades.

‘Based on mark-to-market fair value accounting, the total losses by the system are now estimated at anywhere between US$400 billion and US$1 trillion (between S$542 billion and S$1.35 trillion),’ said Citigroup Singapore country officer Piyush Gupta.

‘These are huge losses that will put this crisis on a par with Japan’s financial crisis in the 1990s and would clearly qualify this one to be one of the worst since the Great Depression,’ he said.

Banks in the United States and Europe are suffering huge losses – that threaten to topple even the most venerable of institutions – as a credit crisis ravages the value of their debt investments, not least in US sub-prime mortgages.

A severe downturn in the US housing market has caused many of these loans to risky homebuyers to go bad. Through complex financial engineering, such lending has sparked a crisis of confidence that has left banks very reluctant to lend.

There are fears that the financial crisis may be spilling over to the real economy, as banks pull back on lending to consumers and companies.

Against that background, GIC deputy chairman Tony Tan called for policy action to help avert a possible worst-case scenario of a deep global recession.

Indeed, well-known investors Jim Rogers and Oei Hong Leong shared GIC’s bearish view, adding that the current troubles are punishment for years of excessive spending by US consumers.

‘We’ve had the worst credit bubble in American history, and perhaps in all of history,’ said Mr Rogers.

‘In some cases, people bought three or four houses with no money down.’

Bankers pointed to longer- term effects of the crisis, predicting that there will be a sea change in the way the financial world prices risk, even after things return to normal.

UBS Singapore country head Gerald Chan said that US financial markets, spurred by easy lending conditions, have been accepting progressively lower rates of returns for any given level of risk.

This is set to change as banks will be more cautious with their lending, he said.

For Singapore and Asia, however, the outlook is considerably more positive.

Bankers said the region’s financial systems are well-capitalised and have relatively low exposure to toxic US sub-prime debt.

OCBC chief executive David Conner said the diversification of the local economy should help buffer growth this year. ‘Nevertheless, as Singapore is a small open economy, it would be hard to escape the effects of a prolonged downturn in the US particularly as we move into 2009.’

Indeed, Mr Oei warned that the effects of a US slowdown may hit Singapore only in two years’ time.

On how policymakers, particularly the Federal Reserve, have performed, views were split with the bankers and the investors standing on opposite sides.

Local financial chiefs generally applauded the Fed’s aggressive rate cuts and unorthodox moves to restore confidence in the US financial sector.

They said that the controversial actions have helped to keep financial markets functioning and have kept potential panic at bay.

But the investors said that the Fed is wrong to bail out Wall Street and said that its actions have weakened the greenback, which will give rise to an inflation problem.

Mr Rogers warned that the Fed is making the same mistakes it did in the 1970s, when it eased monetary policy to stave off a recession, only to spur inflation, which eventually resulted in a slowdown anyway.

Source : Straits Times – 28 Apr 2008

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