Business | Banking
Crisis likely to hit credit card firms
A payment default crisis similar to the one that hitting the US housing mortgage finance market could strike the credit card business, according to experts.
- By Shakir Husain, Staff Reporter
- Published: 00:22 November 21, 2007
Dubai: A payment default crisis similar to the one that hitting the US housing mortgage finance market could strike the credit card business, according to experts.
The US financial system has been shaken by defaults in the US subprime market, where loans were made to people seen as less creditworthy.
Since the similar people are also seen owing money in credit cards, in some cases using plastic to make mortgage payments, the industry is seen susceptible to large-scale defaults from securitised credit card assets.
"I would be surprised if we did not hear more about the credit card issue in the next three months," Larry Summers, former US treasury secretary and chief economist for the World Bank, told a conference at the Dubai International Financial Centre on Tuesday.
Summers said there are links between the credit card debt and housing loans and "it is right to be anxious" about the credit card issue.
He also described the credit card sector as "difficult to monitor".
Participating in a panel discussion, Financial Times commentator Martin Wolf said "how badly it ends up" for the credit card industry is going to be based on the US economy's ability to create new employment. And if the US economy falls into recession, then the credit card default problem is going to come "considerably worse than we can imagine", he said.
The housing loan crisis has led to a lack of liquidity and pushed interest on bank borrowings higher in the US, and its effect have spread to other countries.
Not the end
Organisation for Econ-omic Cooperation and Development Secretary-General Angel Gurria last Thursday warned the world has not yet "seen the end of the problem".
Several leading banks have made huge writedowns due to their exposure to the US housing mortgage market. Banks and financial institutions have become cautious about lending to each other, which led to the US Federal Reserve to cut interest rate and inject cash into the banking system.
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