Mortgage crisis 'will drag the US into recession'
Pastor Dale Morgan
Mortgage crisis 'will drag the US into recession'*
By David Litterick and Ambrose Evans-Pritchard
Last Updated: 2:04am BST 24/08/2007
The chief executive of Countrywide Financial, the mortgage lender handed
a $2bn (Ł1bn) lifeline by Bank of America, said the housing market
showed no signs of improvement and would push the US into a recession.
Calling the credit crunch "one of the greatest panics I've ever seen in
55 years of financial services", Angelo Mozilo added that, although
world stock markets appear to have stabilised, the commercial paper
market was still depressed.
His comments came as the Federal Reserve said the amount of commercial
paper outstanding - which companies use for short-term funding - fell
$90bn last week to $2,040bn.
Bill Gross of Pimco, one of the largest bond traders, said a certain
portion of the market may never return. Meanwhile, the Fed and European
Central Bank continued to inject money into the market in an attempt to
ease liquidity problems.
Nevertheless, signs that the market was stabilising - the FTSE 100 ended
flat on the day while the Dow Jones was trading just five points lower
by early afternoon - led many to suggest that an appetite for risk was
returning.
That appetite prompted BNP Paribas to say it was reopening three frozen
funds, while there were signs that hedge funds and Japanese investors
were renewing bets on the yen "carry trade" - borrowing cheaply in Tokyo
to speculate on higher-yielding assets around the world.
Sterling jumped back above $2 to the dollar, resuming its role as the
high-yield darling of the carry trade industry. It ended the day at $2.0033.
The decision by the Bank of Japan to hold interest rates at 0.5pc
allayed concerns that monetary tightening would soon begin to close the
yield gap with the UK and other major economies.
Governor Toshihiko Fukui said the bank would stick to its strategy of
raising rates back to normal levels as the economy emerged from
deflation. "Distortions and the misallocation of resources could occur
if interest rates are kept at levels inconsistent with the economy," he
said.
The Japanese economy came close to stalling in the second quarter,
growing at just 0.1pc, while prices have fallen for five months in a row.
Mr Fukui said the market instability was largely a healthy purge of
excesses. "Basically we see recent volatile market moves as a process of
risk repricing but we need to continue to monitor market movements and
underlying moves in the world's economy," he said.
Analysts said sentiment was slowly improving. "The market is getting
more comfortable," said Tony Russell at ABN Amro, "but confidence can
certainly be shattered by any more revelations."