SAFE AS HOUSES?

The US subprime crisis hindered Thailand’s economic growth in 2008, writes Krissana Parnsoonthorn

The American Dialect Society chose “sub

prime” as 2007’s Word of the Year. Risky mortgages were a cause for concern among US financial institutions some time before the housing bubble burst in 2006.

The issue blew up a year later, a decade after the 1997 crisis crippled Thailand and wreaked havoc across Asia.

The subprime crisis was born in the financial excesses that helped fuel the US real estate boom. Lured by the prospect of a quick buck from investing in securities backed by mortgages held by people with risky credit histories — the so-called subprime sector — investment funds flocked to the high-stakes gamble.

The total amount of mortgage-backed securities issued almost tripled to US$7.3 trillion between 1996 and 2007. The proportion of subprime mortgages surged from 54% in 2001 to 75% in 2006.

After the housing market collapsed, home prices fell sharply, interest rates hiked, many subprime borrowers struggled to meet payments and credit dried up.

This was declared the worst protracted slowdown in the US housing market since the Great Depression of the 1930s.

Then a chain reaction kicked in. Wall Street investment bank Bear Stearns in mid-June 2008 was the first victim as it was forced to freeze funds exposed to the subprime sector, blocking investors from withdrawing money. Finally, three of the larg

est US investment banks — Bear Stearns, Lehman Brothers and Merrill Lynch — went bankrupt later that year.

Two other investment banks, Morgan Stanley and Goldman Sachs, opted to become commercial banks, thereby subjecting themselves to more stringent regulations.

The subprime lending crisis had severe and long-lasting consequences for the US and European economies. The US entered a deep recession, with nearly 9 million jobs lost during 2008 and 2009, roughly 6% of the workforce.

Housing prices in the US fell nearly 30% on average and the US stock market plummeted by around 50% by early 2009.

While US equities managed to reach their pre-crisis peak in early 2013, the nation’s economic growth remains below pre-crisis levels.

Europe has also struggled with its own economic crisis, with elevated unemployment and severe banking impairments estimated at €940 billion between 2008 and 2012.

Meanwhile, Thailand could not escape the contagion spreading across the Pacific. Four Thai banks — Krungthai, Bangkok Bank, Bank of Ayudhya and BankThai — acknowledged holding investments in offshore collateralised debt obligations (CDOs).

Among the four, only BankThai had exposure to CDOs backed by the subprime housing debt.

The bank set aside 276 million baht in provisions in the first half of 2008 to cover possible losses on a $50-million CDO tranche.

However, the impact on market sentiment and the Thai stock market was much greater than the numbers would suggest.

“SET falls below 800 mark on subprime woes, PTT fallout” declared the Bangkok Post on Oct 31, 2007.

The stock market plunged sharply to below the 800-point barrier in October 2007 and foreign investors shed Thai equities worth almost 40 billion baht as of Dec 7, 2007.

Moreover, the US subprime crisis also hindered Thailand’s economic growth in 2008, increasing the costs for local companies looking to issue debt in the offshore market, so they had to shift to the domestic market.

On Nov 30, 2007, Bangkok Post readers were worried about the impact of subprime woes on the future of the economy after reading a story titled “US trouble could hinder Thai growth, subprime mortgage problems to persist”.

“It is not certain yet how severe the US subprime mortgage crisis will be. In a moderate case, economic growth in the next year could stand at 4.5%. If the situation becomes more severe, chances are that growth will be less than 4.5%,” said Kanit Saengsubhan, director of the Fiscal Policy Research Institute.