NEWS | Wednesday, 22 August 2007

US credit crisis ‘unlikely to affect’ Maltese economy

Charlot Zahra

The credit crisis in US markets that has sent jitters across stock markets worldwide, leading Central Banks across the globe to pump cash into the banking system to avoid a further downfall, should not be affecting the Maltese economy unless it has a long-term impact on global economic growth.
Economist Alfred Mifsud told Business Today: “The Maltese economy will only be effected by US market sub prime mortgage problems if this could somehow negatively effect general world-wide economic growth. This seems unlikely at least on the basis of what we know so far.”
Asked whether he believed that any Maltese investors could have been caught up in this credit crisis affecting the US credit market, Mifsud said that it had “very little impact” on Maltese investors.
“Investors in low quality bonds have seen a drop in the market value of their investments but one has to bear in mind that the default rate on such bonds is at a very low level and that these investments have out-performed other bond investments for more than 5 years.
“So a temporary under-performance is not tragic,” said Mifsud.
So what are the lessons to be learnt from this crisis?
“The biggest lesson is the simplest one really. Only invest in instruments you can understand. Many holders of Collaterised Debt Obligations (CDO) using mortgage bonds as the underlying did not really understand the dynamics of the underlying investments and did not understand that unsustainable easy mortgage credit will eventually backfire and effect the value of the derivatives built of the shaky underlyings,” he explained.
Asked whether a similar credit crisis could occur in Malta, Mifsud said this was “very unlikely as we have no CDO market and banks here have to carry mortgages on their books for their full term so it is not in the Banks’ interest to create an unsustainably easy credit environment.
“Any one who gets a mortgage here knows the thorough process one has to go through to get bank approval. On the contrary in the US mortgages were being approved for less than 5 per deposit over the internet to people without commensurate regular income,” said Mifsud.
On its part, The Malta Financial Services Authority (MFSA), which oversees banking and investments services in Malta, told Business Today that the crisis affecting some financial institutions, and the consequent effect on some capital markets, arose primarily from concentration on particularly risky sectors, such as sub-prime mortgages lent to low-income American households.
“It has no immediate impact on Maltese retail investors,” a spokesperson for the MFSA said yesterday.
Asked how the MFSA was monitoring Maltese credit institutions to ensure that such a crisis did not occur in Malta, the MFSA spokesperson said: “The Maltese regulation and supervision of credit institutions seeks to ensure the spreading of risk, and the avoidance of concentration of risk on any one sector. The liquidity of Maltese institutions was never in doubt.”
Sub-prime loans are higher-risk mortgages offered to people with poor credit histories or low wages.
As US interest rates have increased over the past year, a record number of sub-prime borrowers have defaulted on their loans, leading to extreme financial pressures for firms exposed to the sector.
The knock-on effect has been fears that loans will be harder to come by, not only in the housing sector but in the wider economy, leading to an economic slowdown.
To ease fears over available credit, sparked by the downturn in the mortgage sector, the US central bank (know as the Federal Reserve) has already pumped billions of dollars of emergency funds into the banking system in recent days, twice on Friday and again on Monday.
The European Central Bank and the Bank of Japan have made similar moves.
US stocks have fallen in early trading yesterday, with problems in the mortgage sector continuing to have an adverse effect on market sentiment.
The Dow Jones was down 63 points to 13,173, while the more technology-based Nasdaq index lost 0.6 points to 2,542. The falls came despite the Federal Reserve saying it would inject more funds into financial markets if needed.

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