Subprime Mortgage Crisis and It’s Ripple Effect

Experts are of the opinion that the mortgage crisis is perhaps the biggest financial shock the country has been subjected to following the Great Depression of the 1930s and early 1940s. The subprime mortgage crisis in USA which erupted due to the bursting of the housing bubble did not leave the major economies of the world unscathed. The International Monetary Fund (IMF) anticipates that the country’s GDP growth would be approximately 0.6% in 2009.

Liquidity issues in the banking sector are being manifested as a result of the subprime mortgage crisis. The problem got worse due to foreclosures, which increased tremendously during the end of 2006. This rekindled a global slowdown in the economy during 2007 through 2008.

High default rates marked the beginning of the crisis when individuals not qualifying for loans (subprime) were granted the same. This made deals riskier. The subprime debtors had a damaged credit history and were not able to repay the loan amount. Uncertainty prevailed as the housing market did not turn out to be the way it was expected.

Statistics confirm that approximately 1.3 million housing properties in the United States of America faced foreclosure in the year 2007. To add to the woes of the real estate operators, the ARM or the adjustable rate mortgage interest rates were reset at a higher percentage. As of February 2008, banking as well as non banking financial institutions recorded loss worth USD$170 billion.

Effect of US subprime mortgage crisis on world economy

Subprime mortgage crisis in USA has not only caused a severe recession but economies worldwide have also suffered tremendous set back. Some of the countries may have felt it earlier and some of them could resist the wave for a couple of months. Eventually all major economies succumbed to the subprime crisis. Let us see how markets starting from Asia, Australia and Europe have fared, following the mortgage crisis in USA.

1. Key index of South Korea dropped by 4%
2. Benchmark indices of Hong Kong and Thailand have dropped by 3% plus.
3. A massive sell off was witnessed in markets of Asia.
4. Stock market experts in Great Britain are yet to decipher the underlying causes of the economic showdown.
5. Stock markets of Thailand, Australia and Germany were badly hit.
6. France, Britain and Germany witnessed fall in their major indices by more than 2%.
7. The IKB Deutsche Industriebank was badly affected by the US subprime mortgage crisis.
8. Asian financial market witnessed the withdrawal of all shares by First State Investment.
9. Macquarie Bank, a prominent financial services company in Australia announced that investors may lose as much as 25% or more of their investments.

Cachet Gomes


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