Sub-prime Crisis Has More Echoes To Come

Repercussions from the sub-prime mortgage are still reverberating around the UK economy, and the bad news may not have ended. Bank of England deputy governor Sir John Gieve says ‘only part of the losses on sub-prime have yet been declared’.

Last week Merrill Lynch announced full-year losses of £4.3bn for 2007, with a £5.75bn write down in the fourth quarter. There was also a £1.5bn charge against hedge funds that Merrill took out with ‘monolines’ – companies who ensure against credit risk.

So the credit crunch continues to spread: it has gone from risky sub-prime mortgages to asset-back securities, and now to credit insurers.

Not everything has been unveiled yet. New chief executive at Merrill John Thain could not guarantee that Merrill Lynch was now free of sub-prime risk and some risky assets on its balance sheet may have to be reconsidered in 2008.

It is thought that Merrill may be the biggest creator of collateralised debt obligations, which are created from mortgage debt, so some risk remains. The company has raised £6.6bn of new capital from Near and Far East investors to relieve some of the pressure on itself.

Merrill is attempting to clean its slate, but some of the other big banks in the UK seem more reticent about their sub-prime exposure. HSBC declared a loss; Barclays share are 37% down over the last year; HBOS shares have suffered over a 43% fall. They do not appear to be very forward with their sub-prime losses, but the market appears to fear for them.

There certainly seems to be more than meets the eye to the UK sub-prime crisis. It is quite evident that there is more to come, and the market probably has a long way to fall yet, before confidence is regained in the banking sector and its trust in its fellow bankers