“Butterfly effect” in the USA mortgage crisis
15 - October - 2007 | 0Issue 5/ October - November 2007
By I. Máñez
If a butterfly flaps in Beijing, New York climatic systems could change next month. This idea known as “butterfly effect” is a visual example of world repercussion of the USA mortgage crisis. Due to a current globalized world, economy cannot escape from this parable. Thus, if the first world power is in recession, the rest of world economies will be also affected somehow or other. This was the case of Spain with six funds and five investment companies affected by the subprime mortgage crisis.
Flapping beginning
Unlike other North-American crisis where terrorism or the technological bubble explosion have been immediate causes, the present one is related to property market in the extremist way. This time the butterfly flapping is provoked by the increase in subprime mortgages non-payment, also known as “garbage mortgages” because they are soft in concession conditions but hard in interests. Non-payment has increase in 14% in such mortgages (given between 2003 and 2004 to people in a high-risk financial situation) together with housing prices nosedive in the USA have provoked the present crisis hitting the main world parquets.
The American Federal Reserve, the highest monetary authority in the USA, trying to calm investors has made light of it pointing that just three North American banks out of 56 have admitted to having 20% “subprime” mortgage credits. In this sense, leaders of the economic organism have stated that the USA commercial banks exposure to subprime mortgage problem is generally small. However, the constant non-payment rise in this sort of mortgages and differences with traditional mortgages (less than 1%non-payment) did not calm investors’ fears.
To raise trust in property market, the first central banks measure was to ask a higher interest rate to lend money. This rise hindered credit access and as a consequence the Federal Reserve had to inject cash money to improve liquidity. The second step carried out by the USA Federal Reserve was a half point reduction in federal interest rates until 4,75% for fear of property crisis could damage the rest of economic areas.
Spanish effect
On the other hand, Spanish interests in property market could never escape from the butterfly flapping. According to the National Commission of the Stock Market (CNMV) a total of six funds and five investment companies have been affected by the North American credit crisis. This capital invested in American property market, around 36,7 million are directly related to garbage mortgages.
According to CNMV Spanish funds most affected are March Monetario Dinámico, Gescooperativo Multiestrategias Alternativas, Gesccoperativo Tesorería Dinámica, Can Dinámico Plus, Laietana Gestiò Activa and Cajamar Monetario Dinámico. On the other hand, investment companies involved are CCR Invest 2001, Inversions the Cirerer , Volga of Valores Inmobiliarios, Cifuentes of Inversiones and Ansafer Inversiones. Foreign funds temporary suspended are Oddo Cash Plus, ABS Invest Unico, Parvest Dinamic, ABS Fund de WestLB Mellon and Oddo Court Terme Dynamique.
A special case is Cajamar because it has 1,70% of Oddo Court Terme Fund assets likewise 2,27 % of Oddo Cash Plus Fund. Both shares are estimated 895.000 euros paralyzed due to crisis. Likewise, Cifuentes de Inversiones managed by BBVA Patrimonio has 97.000 euros paralyzed resulting from the 2,6% share in the Parvest Dinamic ABS Fund, suspended by BNP Paribas.
To sum up, according to CNMV data, the effect over collective investment institutions has been minimum because the crisis just affects 46,9 million out of 290.000 million euros invested, 0,016% of total assets of such funds and Sicav, and 2,9% of assets of the 14 Spanish companies involved.
In the other side of the Atlantic Ocean, the butterfly flapping seems a summer storm. A properties prices reduction and a rise in mortgages go together with the Spanish Stock Exchange fall. Like George Bush came to the fore to defend American property model feasibility, the Spanish Economy minister, Pedro Solbes has stated that at the moment there is no direct risk for Spanish finance and property market but there are “indirect effects” due to North American crisis. Maybe Solbes had in mind what at the beginning of 2007 alerted the International Monetary Fund concerning property speculation in Spain and effects on Middle class.
The continuous rise in interest rates is affecting negatively Spanish families’ incomes and some companies’ profits. As an example some figures: 2006 ended up with 831.800 million euros debt of household budget. In other words, 171% increase over 1996, a figure that represents 133% of available gross incomes in 2006 that jeopardizes mortgage refunding power. For a Spanish consumer, the main problem of the USA credit crisis is a Euribor rise that leads mortgage fees and has significantly grown this year.
Spanish property markets specialists are more alarming as Property Expert Net (REI) that points 30% property agencies in Spain could close in 2007 whereas the rest should restructure to face the property sales reduction and the beginning of a new cycle in the area. As an example Fincas Corral has decide to close half of its offices as “adjustment” to property industry.
Despite the Central European Bank and the International Monetary Fund have stated that the USA credit crisis will not affect Spain in short-term, it is surprising that Santander Bank has confirmed “non punctuality symptoms” in mortgage payment as a consequence to a rise in interest rates. However, the financial institution assures that there was not an increase in non payment as it is happening in North American subprime mortgages
Conclusion
It is true that the USA property market is in a financial crisis due to subprime mortgage non payment but it is also true that these effects could not be generalized to the whole American territory. Like in Spain, the first world economy has market niches out of the crisis. For example property market in cities such as Portland, Seattle or Manhattan continues breaking records in house prices.
Moreover, whereas in Spain there is a housing market deceleration, in the whole European Union (EU) property investment has reached 120.000 million euros in the first 2007 semester. In other words, 9% increase over the same month last period according to the Bulletin of European Capital Markets of Jones Lang Lasalle consultancy.
Re-taking the “butterfly effect” theory, it is difficult to predict the end. It is soon to know if the butterfly flapping in Beijing will provoke a hurricane in New York. The theory of the meteorologist Edward Lorenz pointed that small variations of the initial condition of a nonlinear dynamical system may produce large variations in the long term behavior of the system. In other words, I want to say that in a globalized world with different visa markets, decisions of the Federal Reserve and the Central European Bank will be decisive to assess the effects of the American financial crisis on the Spanish and World economy.
I. Máñez
Journalist
Global Affairs is not liable for author’s opinion
