The subprime crisis in US, following the burst of the housing sector boom bubble has sent ripples through the economies of many countries around the globe. During the high demand period for housing loans in the USA, when the real estate sector was booming, people with bad credit history and higher chance of defaulting repayment were provided loans at higher-than-normal interest rates (sub-prime rates). However, a decline in economic activity in the United States of America resulted in lower disposable income and hence a decline in demand. Simultaneously there was a rise in supply due to repayments and foreclosures arising out of a higher interest rate. This triggered off the subprime crisis.
Over the last few months the entire world has faced the heat of the US subprime crisis. It was initially felt by some, that major economies would not be significantly affected by the crisis. However the crisis is fast blowing out of proportions affecting major economies worldwide directly or indirectly. Some experts even feel that this crisis may match or even outmatch the proportion of economic devastations of the great depression.
Sectors like stock markets and bank investment funds have been affected worldwide, especially in Europe and Asian countries. Central banks of many countries in Europe and Asia have taken evasive action to prevent credit crisis that can lead to economic recession.
The European Central Bank (ECB) sprung into action to prevent a liquidity crunch in Europe. This intervention by the ECB was a major eye opener. Some of the major impacts in Europe include -
BNP Paribas, the French bank had three invest funds that were posed to the subprime market in USA. The bank stopped withdrawals from these funds.
Losses were faced by NIBC, a Dutch investment bank during the first half of 2007.
Losses were faced by Dillon Read the fund affiliated to UBS, the Swiss Bank.
Rhineland Funding affiliated to IKB, a German bank was substantially hit by the subprime crisis.
In Japan, The Japanese Yen lost out on the advantages of lower interest rates due to increase in the value of Yen due to the US subprime crisis. Japan's central bank has noted that the impacts of the crisi on Japan have been far more intense than anticipated and that Japan's economic growth had been slowed down considerably.
Impacts have started to surface in China with a sharp fall in shares of Chinese banks. Shares of bank of China fell by 6.4% and 4.1% in the Hong Kong and Shanghai markets respectively.
In India, the comparative rise in the value of the Rupee, vis-à-vis the US Dollar is expected to hit exports significantly. Indian companies involved in mortgage processing for USA have faced a decline in work orders. India has also faced major falls in the stock markets recently, which have been attributed to the US subprime crisis by many experts.