US Subprime Woes To Hit Europe Harder Than Asia
Mounting US credit market problems will have a greater ripple effect in Europe than in Asia, according to H&R Block Financial Advisors.
Writing in Barron’s Online (subscription required), Block says US credit impacts have translated most directly to UK and European capital markets. Both regions may see market and economic impacts similar to those found in the US. Credit exposure in the Asia/Pacific region is expected to be minimal.
However, potentially slower consumer demand from US consumers could impact these markets in the months ahead, Block says. The growing importance of the Chinese economy to other Asia/Pacific economies may mitigate the negative impacts to some degree.
Should US consumer demand slow dramatically, Block expects the Asia/Pacific region and Japan to come under material, ongoing pressure.
Block is instituting an Overweight recommendation on Asia/Pacific (up from Equalweight) and reducing its outlook on Europe to Equalweight (from Overweight).
Meanwhile Oxford Analytica sees the spillover of US subprime problems having mainly an indirect effect in the United Kingdom. Due to the different structure of the UK market, Oxford does not anticipate a surge in mortgage delinquencies. Rather the concern is that lenders will become more conservative, making less credit available, especially to less well-qualified buyers.
Since most loans are backed by investor deposits and are not securitized, banks and other lenders have less exposure to mortgage problems in the UK. Exceptions are Bradford & Bingley and Northern Rock. The latter follows the US practice of packaging and securitizing its loans, and is under pressure to raise interest rates to cover the rising costs of borrowing, Oxford says in “UNITED KINGDOM: Credit crisis set to limit lending,” available for purchase here. This has harmed its competitiveness, causing a 50% fall in its share price over the last six months. The bank has been subject to short sales by hedge funds, and is now seen as a takeover target.
Recognizing that Northern Rock is an “obvious target for market concerns,” CreditSights says it “thinks the fears are overdone,” in a report available for purchase here.
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