Mon, Aug 13, 2007 - Page 8 News List

Editorial: Time for cool heads and tight leashes

The central bank was on a public relations mission last week to remind worried consumers and businesses that the domestic financial market was functioning well and there would be no liquidity shortage despite concerns about a possible trickle-down effect from the US' subprime mortgage woes.

The Financial Supervisory Commission also said banks, insurers and securities investment trust firms would only have limited losses from exposure to US subprime mortgage-related instruments. It said that preliminary results of its survey of domestic financial institutions showed potential losses from exposure to subprime mortgage-related products totaled about NT$2.5 billion (US$75.9 million).

Such confidence could be misplaced.

International ratings agencies, including Standard and Poor's, Fitch Ratings and Moody's, have estimated that Taiwanese financial institutions may face losses ranging from NT$3.75 billion to NT$7 billion.

The biggest problem facing the market, however, is uncertainty -- a feeling that no one knows how serious the subprime debt concerns are, how much they will spread and whether financial institutions will be able to handle the losses.

The problem is there's no clear indication of when such fears will stop affecting market sentiment. The fact that the central banks of several major nations worked together last week to calm money markets was a sign that the real situation may be worse.

The problems associated with the US subprime mortgage market were well documented earlier this year. Less well understood, however, is how the monetary authorities and investors all over the world would respond to these problems -- starting with defaulted subprime loans and then growing into broader market turmoil due to trading of high-yield but risky collateralized debt obligations and other subprime mortgage-based derivatives.

Governments around the world are trying to calm market fears. It may take days, weeks or even months to completely rebuild market confidence worldwide. We need to monitor the situation as the US subprime mortgage crisis will probably impact on housing markets, slow private consumption, erode market sentiment and reduce global economic growth.

Therefore, the central bank should continue monitoring the nation's liquidity status and calm the market with its latest risk assessments in a timely and transparent manner.

Perhaps a better remedy to protect investors from rampant speculation on subprime debt-related losses is for the commission to require domestic financial institutions to specify just how much of their investments are linked to the US subprime market and provide their most accurate estimates of possible losses.

As borrowing costs have been rising and banks have tightened mortgage lending, investors should also recognize that the local real estate market may cool.

We have seen significant price increases in properties across the globe in recent years, as well as concerns that more countries could see the property bubble burst.

While the growth in the real estate market varies from country to country, there has been one thing in common in all these markets: Growth has been driven by investors chasing quick profits. This growth is likely to disappear as soon as investors realize their profits could vaporize.

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