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Friday, 8 August 2008

Mountains of losses may bury markets: pundits

Financial crisis is the worst the world has faced since the 1930s, crack panel tells The Business Times
By ANTHONY ROWLEY
IN TOKYO

THE global financial shock sparked by the US sub-prime mortgage crisis is far from over, according to leading international financial experts. There is still a major risk of a 'meltdown' as economies battle what is shaping up as the worst slump since the 1930s, a group of them - including financial guru Marc Faber and investment veteran Mark Mobius - warned at a symposium organised by The Business Times.

Total losses suffered by financial institutions worldwide in the wake of the sub-prime debacle will run into trillions of dollars - possibly as much as US$10 trillion, rather than the billions envisaged originally, some suggest. And the US budget deficit could 'explode' as Washington seeks to stem a real estate haemorrhage and restore confidence

The experts' analysis (which appears inside on Page 13) is a far more sobering assessment of the dangers facing the world economy than has generally been presented so far. It comes as markets are again suffering tremors - with the US Federal Reserve once more forced to pump confidence-boosting liquidity into the financial system.

Equity markets are threatened with an 'avalanche' as financial system aftershocks continue, the expert panel warns. And according to Mr Faber, this could turn into a drawn-out process or 'water torture' bear market.

Former Wall Street executive and one-time World Bank group official Ernest Kepper reckons stock valuations could fall as much as 40-50 per cent from their peaks a year or so ago.

And Mr Mobius says: 'There is a big risk of a meltdown of the (US) financial systems brought on by a lack of confidence.'

Lehman Brothers' New York managing director and chief US economist Ethan Harris rejects any suggestion that US government debt is 'not safe' amid the crisis at mortgage giants Fannie Mae and Freddie Mac.

But Mr Faber suggests: 'We are in the midst of an unprecedented credit growth slowdown that will hit all asset classes one after the other as liquidity tightens and deleveraging becomes the order of the day.

'First, home prices came down. Then financial stocks. And now, commodities, material and energy stocks. Bonds will eventually tumble too. Even art prices will fall.'

Inflation is seen as the immediate threat as food, fuel and other commodity prices soar. But governments may soon find themselves battling deflation, the experts warn.

Mr Kepper says: 'As the financial avalanche builds and recession hits oil-importing countries, the combination of a severe US recession and a global slowdown will shift the focus away from inflation to the slipping demand for real goods.

'This will lead to a reduction in prices when supply exceeds demand. There will be downward pressure on labour markets and rising unemployment, while at the same time, commodity prices fall in accordance with reduced demand.'

William Thomson, a former vice-president of the Asian Development Bank and now head of a financial advisory group, says the sub-prime crisis is 'undoubtedly the worst in the developed world since the 1930s'.

He reckons the only period remotely similar is the bear market of 1973-75, which was driven by surging oil prices and stoked annual inflation rates to around 20 per cent. 'That has not yet arrived but may well be in the pipeline,' he says.

But he believes the situation is far worse this time because the US financial system is extraordinarily stretched and stressed.

'Last time, we only had the minor bankruptcies of Franklin National Bank and Continental Bank to contend with,' he says. 'Then, there were no derivatives. But now, they amount to more than 10 times world GDP and a greater multiple of bank capital. Within that total, the most toxic ones are those of unlisted, opaque, over-the-counter

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