US will feel impact of financial crisis for five years

Dubai: The impact of the financial crisiswill be felt in the US for the next five years, but quick action here in the Gulf means liquidity is still strong.

"If you look at the Gulf, what you see is a situation where, with very high energy prices, the countries in the Gulf were gaining revenue very rapidly from export receipts, and domestic demand was rising quite rapidly, they had been placing assets abroad," Malcolm Knight, vice-chairman of Deutsche Bank, said.

As the banking system became more impaired, the Gulf countries weren't so affected because they are a hefty source of liquidity for the international financial system.

"They redirected their assets into the safest forms so for that reason, the impact of the financial problems in the large international banks was very well managed here," Knight added.

Several banks in this region also took action very early on to mitigate the potential effects if the financial storm. Such actions included injecting cash into the banking sector and cutting the growth of credit to finance equity transactions.

Potential bubble

"This pricked a potential bubble in equity markets and was very effective in maintaining financial stability," Knight said.

The impact of the credit squeeze will continue to affect the US "for at least the next five years" as households struggle to get back on track.

Homeowners in the US thought they could buy houses larger than they could afford, thinking they could pay off the mortgage with the money they would make on the price appreciation, according to Knight.

"The household saving rate will rise significantly but it will be a very painful process," warns Knight.

This should serve as a stark warning to homeowners in the Gulf, where many have bought properties on the assumption they will always appreciate in value.

Also, as lending rises in the region, with more and more people having credit cards and taking out personal loans, Knight warns that it is never a good idea to borrow beyond your means.

"If people are adopting this attitude here, of borrowing to spend more and consume, it is not a disciplined lifestyle," Knight said.

Knight was speaking to Gulf News on the sidelines of the World Economic Forum on Saturday. The current household savings rate in the US is around zero per cent but it is just starting to rise again.

The general outcome of the financial crisis, said Knight, was that now even the largest banks are unwilling to lend, even to each other, even short-term because of uncertainties about their own liquidity needs.

"This is unprecendented and it has made the core of the international banking system dysfunctional," said Knight.