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Credit crunch puts squeeze on Europe

Stephen Beard Aug 9, 2007

Credit crunch puts squeeze on Europe

Stephen Beard Aug 9, 2007


Kai Ryssdal: BNP Paribas has this great feature on its website. Where you can listen to an audio version of their press releases. The one from this morning’s worth a special listen.

BNP PARIBAS LADY: The complete evaporation of liquidity in certain market segments of the US securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating.

It almost doesn’t matter if you understood all of that. All you had to get was the beginning. The complete evaporation of liquidity in certain markets. Certain markets, of course, would be this one. The squeeze in the U.S. credit market as a result of the subprime mortgage debacle.

Marketplace’s Stephen Beard is at the European Desk in London. Hello, Stephen.

Stephen Beard: Hello, Kai.

Ryssdal: So we wake up this morning in this country, Stephen, and BNP Paribas has said something that obviously was greatly disturbing. What exactly happened?

Beard: The French bank suspended three of its investment funds worth around $2.5 billion. The funds had bought a big slice of the American subprime mortgages that have been parcelled up and sold off to banks around the globe. Now as we all know, a lot of these mortgages have gone bad for homeowners are in default. So, these mortgage-backed securities that BNP Paribas have bought look to be worthless. BNP Paribas is holding what its called in financial markets “toxic waste.”

Ryssdal: The European Central Bank responded swiftly, I suppose it should be said. They pumped about $130 billion into the market, into the banking sector. Why?

Beard: Well, BNP Paribas is only the latest sign that credit markets are in trouble. Investors are getting a lot more nervous about buying up these parcelled up loans, these securitized loans. So to ease the market, the ECB, the European Central Bank, it offered European banks at relatively modest rates of interest this sum of money. And 49 and banks and other financial institutions said, “Yes, please.” This is essentially the European Central Bank acting as the lender of last resort, making sure that credit doesn’t dry out.

Ryssdal: That $130 billion that the ECB let fly this morning, has it calmed things down? How are people reacting?

Beard: Yes, it seems to have brought a little bit of order. Although it’s also raised a number of questions. The primary one being, how serious is this? You have the optimists saying, “This will be turmoil in stock and bond markets for a few weeks, and then it’ll settle down.” Pessimists say, “We could be seeing the start of something much more serious in the real economy.” If banks grow ever more reluctant to lend because of the losses they’ve sustained, that could hit economic growth.

Ryssdal: The U.S. market, Stephen, as I’m sure you’ve seen the past 10 days, two weeks, have been volatile in the extreme, up and down 200 points in a day. Has the same thing been happening on European


Beard: Very much so. The European

have really been following the American market. The Dow ends down, and the European markets open down. The Dow picks up and the European markets follow suit.

Ryssdal: Give me a little Globalization 101 here, Stephen. Obviously, U.S. banks and mortgage-lenders are being affected by the subprime issue and the credit squeeze. Why now in Europe is it happening?

Beard: Well, this is, I think, the most fascinating aspect of this. It seems that what is happened is American banks have very cleverly been shoving large amounts of this low-grade material over onto this side of the Atlantic. What appears to have happened is this: In the low-interest rate world that we’ve lived in over the past few years, banks and other financial institutions have been increasingly desperate to get higher yields, to get a bigger return for their money. That has attracted them to these what turn out to be now very risky American subprime mortgages.

Ryssdal: Stephen Beard at the Marketplace European Desk in London. Thank you, Stephen.

Beard: OK, Kai.

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