LONDON/NEW YORK: The slump in global credit markets will force banks, brokerages and hedge funds to cut lending by $2tn, triggering the risk of a “substantial recession” in the US, according to Goldman Sachs Group Inc.
Losses related to record US home foreclosures using a “back-of-the-envelope'' calculation may be as high as $400bn for financial companies, Jan Hatzius, chief economist at Goldman in New York wrote in a report on Thursday.
The effects may be amplified tenfold as companies that borrowed to finance their investments scale back lending, the report said.
“The likely mortgage credit losses pose a significantly bigger macroeconomic risk than generally recognised,'' Hatzius wrote. “It is easy to see how such a shock could produce a substantial recession” or “a long period of very sluggish growth,” he wrote.
Goldman’s forecast reduction in lending is equivalent to 7% of total US household, corporate and government debt, hurting an economy already beset by the slowing housing market.
Wells Fargo & Co chief executive officer John Stumpf said on Thursday that the US housing market is the worst since the Great Depression.
Citigroup Inc, the biggest US bank, and Merrill Lynch & Co have led companies writing down more than $50bn on securities linked to US subprime mortgages.
Hatzius said his report is based on a “conservative estimate” of investors cutting lending by 10 times the loss to their capital. Investors realising half of the potential losses, at $200bn, would have to scale back lending by $2tn, he said.
The US economy risks falling into recession if the reduction occurs over a single year, Hatzius wrote. The drop in lending spread over two to four years may result in “very sluggish growth,” he said.
Goldman’s US economic forecasts already assume lending will fall by $1tn over the next two years, or half of the potential loss to the economy, the report said, without providing an updated forecast.
The New York-based bank expects US growth to slow to 1.9% in 2008, less then the 2.4% median forecast of 70 economists surveyed by Bloomberg News on Nov. 1 to 8.
Joseph Stiglitz, the Nobel-prize winning former World Bank economist, said in an interview yesterday that the US faces a “very major slowdown, maybe recession” because a “consumption binge” fuelled by household borrowing. – Bloomberg |
