The subprime crisis in the US, following the collapse of the housing sector boom, has sent ripples through the economies of many countries. During the high demand period for housing loans in the US, when the real estate sector was booming, people with a bad credit history, and a higher chance of defaulting on on their payments, were provided loans at higher-than-normal interest rates (sub-prime rates).
A decline in economic activity in the US resulted in lower disposable incomes and hence a decline in demand. Simultaneously there was a rise in supply due to repayments and foreclosures arising out of a higher interest rate. This triggered the subprime crisis. Over the last few months, the world has been hit by the heat of the US subprime crisis.
It was initially thought by some that other major world economies would not be significantly affected. However, the crisis is quickly becoming a problem, affecting major economies worldwide both directly and indirectly.
Some experts feel that this crisis could match or even outmatch the economic devastation of the great depression. Such sectors as stock markets and bank investment funds have been affected worldwide, especially in Europian and Asian countries.
The central banks of many countries on these continents have taken evasive action to prevent credit crises that could lead to economic recession. The European Central Bank (ECB) took action to prevent a liquidity crunch in Europe. This intervention by the ECB was an major revelation.
Some of its major impacts in Europe include:
The French bank BNP Paribas had three investment funds that were connected to the subprime market in the US. The bank stopped withdrawals from these funds.
Losses were faced by NIBC, a Dutch investment bank during the first half of 2007.
Losses were faced by Dillon Read, the fund affiliated with UBS, the Swiss Bank.
Rhineland Funding, which is affiliated with the German bank IKB, was substantially hit by the subprime crisis.
The Japanese Yen did not benefit from the advantages of lower interest rates because of an increase in the value of the Yen. This increase was due to the US subprime crisis. Japan’s central bank has noted that the impacts of the crisis on the country have been far more intense than anticipated and that Japan’s economic growth has slowed considerably.
Impacts have started to surface in China with a sharp fall in the shares held by Chinese banks. Shares held by the Bank of China fell by 6.4% and 4.1% in Hong Kong and Shanghai markets.
In India, the rise in the value of the Rupee versus the US Dollar is expected to damage exports . Indian companies involved in mortgage processing for the US have faced a decline in work orders. India has also recently faced major falls in stock markets, which have been attributed, by many experts, to the US subprime crisis .