Thursday, July 29, 2010

Why house prices will collapse and interest rates will rise

Europe's €30 trillion headache

The rating agency Standard & Poor's said banks are at risk of a vicious circle as sovereign debt fears and financial stress feed off each other. Most of their mortgages and other personal loans stay on their balance sheets and require funding. This contrasts with the US, where financial institutions securitize (these) loans and which do not require balance sheet funding. The collective funding needs of Europe's banks are vast. Total liabilities are €23 trillion for the Euro-zone and €8 trillion for the UK, Sweden, and Denmark. The lack of funding over the next 2 years must surely mean a collapse in house prices and mortgage interest rates.

Posted by miken @ 11:30 AM (1782 views)
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4 thoughts on “Why house prices will collapse and interest rates will rise

  • Oops, meant to say: The lack of funding over the next 2 years must surely mean a collapse in house prices and HIGHER mortgage interest rates.

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  • Basically Trichet and the ECB is willing to see a long recession/depression so that bankers and bondholders can avoid accepting their losses. Will they allow a major bank to implode, Lehman-style, so they can extort trillions of euros from the EU member states? Maybe.

    The over-lending to the PIGS was supply-driven by the banks, which are trying to get over a “Greece living beyond its means” narrative. The drive by finance capital to make huge profits from the massive and indiscriminate extension of credit to the PIGS is a replay of Wall Street’s subprime crisis, the Third World debt crisis of the ’80s and the Asian financial crisis of the ’90s. Should the PIGS follow Argentina, which gave its creditors a major haircut in 2003, and thrived as a result, or should they follow those countries (e.g. Phillipines and Mexico in the ’80s) which forked out a quarter or a third of government budgets to creditors and stagnated as a result?

    If the PIGS left the euro and restuctured their debts they would have flexibility to deal with their creditors and their exports, including tourism, would thrive. So where’s the crisis? Just that bank investors will take large losses.

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  • mark wadsworth says:

    Excellent stuff, although that EUR 8 trillion is wildly overstated. More than half of that is just banks lending to other banks. If you net it all off, it’s probably about EUR 3 trillion. Not that the banks will be able to refinance EUR 3 trillion either, of course.

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  • fallingbuzzard says:

    Does anyone really think that this emergency support will ever be withdrawn?

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