The beginning of the end?

There is a risk that behavioural changes resulting from the US sub prime crisis could lead to a global economic slowdown, warns Concord Capital senior analyst Oliver Ansted.

Ansted said we are currently seeing a spiral effect from the recent curtailment of credit by lenders.

“What started out as a fairly contained situation in the funding aspect of a segment of the mortgage market in the US has translated into a global credit squeeze for almost every asset class,” he said.

“Initially it started out as a problem in the lower grade mortgage market in the US market and as the risk has become apparent you’ve seen it escalate to other mortgage bands, migrating up the food chain from the lowest quality mortgages into broader mortgages, so those mortgage providers are having problems accessing normal funding to do their business.

“The wholesale market has basically gone on strike in the mortgage market and that’s fanned out into other loan classes.”

Ansted explained that if this situation continued, it has the potential to negatively impact the economy.

“Credit markets pretty much seized up and the risk from here is that if credit stops getting extended in the economy, the economy starts to have trouble growing,” he said.

“If the investment market starts to factor in that picture then obviously equity prices with fall, which will then feed into confidence further and the whole thing spirals.”

Ansted said investors were already starting to price some of these effects in the equity market.

“The curtailment of credit has the risk of feeding directly into the economy, and the sentiment impacts, which could happen in parallel, could happen through confidence, which is quite observable through the equity market and does have a spill over into consumer sentiment.”