Europe s Subprime Quagmire

Sub Saharan Africa s Subprime Borrowers

The impetus for a big subprime market came from within the private sector innovation by giant mortgage lenders like Countrywide, Ameriquest, and many others, backed by the big investment banks.

In August 2007, the decision by BNP Paribas to close two of its hedge funds exposed to the subprime sector precipitated a liquidity crisis for all European banks during that summer.

This, of course, is just the story of subprime mortgages in another guise.

A year ago, however, with the subprime mortgage meltdown of August 2007, I became certain.

The first lesson is that, despite the limited overall volume of subprime loans, the subprime crisis could blow up into the biggest financial crisis in living memory, because an overstretched financial system was unable to cope with even limited losses.

To get more people to borrow more money, credit standards were lowered, fueling growth in so called subprime mortgages.

And essentially the same happened with US subprime mortgage lending and with the Spanish banking system in the 2000 s.

During the subprime boom, large banks were more likely to want to expand, and thus had greater incentive to comply.

After the subprime crisis erupted, mortgage and consumer debt was paid down by households either with their savings or by default.

BRUSSELS Back in 2007 2008, when the financial crisis was still called the subprime crisis, Europeans felt superior to the United States.

One governor opined that the Fed should regard it as a good thing that markets were starting to worry about subprime mortgages.

We saw this in the summer of 2007, when the subprime crisis erupted, and again in 2008, following the collapse of Lehman Brothers.

Indeed, subprime mortgage lending delivered illusory wealth increases to Americans at a time when they were suffering from stagnant or falling real wages.

Coming so shortly on the heels of the subprime crisis, the debate over the debt ceiling and the budget deficit is the last straw.

Never mind the subprime crisis of August 2007 or, closer to home, the European monetary crisis of August 1992 the August holiday is a venerable tradition.

According to this group, misguided government policies, aimed at increasing homeownership among relatively poor people, pushed too many into taking out subprime mortgages that they could not afford.

No wonder, then, that one influential banker regarded as a possible successor to PBOC Governor Zhou Xiaochuan has warned of the possibility of a Chinese style subprime crisis.

The Germans want the ECB to focus only on large systemic banks, and leave smaller savings banks (like those that invested heavily in subprime mortgages) to national authorities.

While financial institutions tried to mitigate risks by bundling subprime mortgages, Fukushima s cooling system was able to cope with either a blackout and an earthquake or a tsunami.

This, of course, is just the story of subprime mortgages in another guise. The result was increased US spending and the descent of measured household savings into negative territory.

Indeed, lending to governments and banks in the European periphery represents the European equivalent of subprime lending in the US (which was also concentrated in a few sunshine states).

Debt relief created fewer problems for banks in the US because a significant proportion of the subprime loans packaged into AAA rated securities had been sold to gullible foreigners.

After all, when the global financial crisis erupted in 2008 from the bowels of the American subprime mortgage market, global investors responded by fleeing to the US, not from it.

In the aftermath of the subprime crisis and the collapse of Lehman Brothers, fingers were pointed at the United States as an example of how badly things could go wrong.

Its members could not agree even on how to define subprime mortgages and calculate how many such mortgages there were in the United States at the time of the crisis.

What started with subprime mortgages spread to all collateralized debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi trillion dollar credit default swap market.

On the basis of political and operational priorities, UNMIS has established a full time military observer presence in Juba (Sector I), Wau (Sector II), Malakal (Sector III), Kadugli (Sector IV), Ed Damazin (Sector V), Abyei (Sector VI) and Kassala (redeployment coordination headquarters).

A good proportion of the losses on subprime lending was thus borne by banks from Northern Europe, leaving these banks in no position to sustain further losses on their European peripheral lending.

In 2008, when the Landesbanks were found to be full of American subprime mortgages, the German government bailed them out with a 500 billion ( 650 billion) rescue package at its taxpayers expense.

By late 2007, for example, the Fed and the US Treasury had most likely already seen at least one report arguing that only massive intervention to support subprime loans could forestall a catastrophe.

Private sector capital flows now dwarf traditional public sector aid flows.

Public sector

Private sector

Sector 2

Sector 3

Sector 4

Primary sector

Secondary sector

Tertiary sector

Sector status

Science sector

Culture sector

Education sector