No end in sight to credit woes and economic angst

International market confidence in 2007 was fragile because of the credit squeeze. It's a theme that looks set to endure into 2008.

With its genesis in the bursting of the US housing bubble, and the consequent failure of many subprime mortgage products, the credit crisis soon infected all interconnected financial institutions, leaving them fearful of lending to each other.

Investors eventually realised this would leave banks nursing writedowns of billions of dollars — a number of banks successfully sought injections from cash-rich sovereign wealth funds in order to bolster their creaking balance sheets.

Meanwhile, hedge funds had one of their worst-ever years for public relations in 2007 with a series of high-profile blow-ups, government demands for tighter regulation and even accusations, in the US, of profiteering from home repossessions. But according to Chicago-based Hedge Fund Research the average fund raked in profits above stock market indices.

However, the crucial question was whether the disease would spread from Wall Street to Main Street and if this was to be the case, whether any subsequent US slowdown would derail the global economy that was being helped along by developing powers such as China and India.

So, two things still hang over investors — credit woes and economic angst. Of the two, the former may offer the biggest challenge because it is truly unknown territory and also feeds directly into the latter.

"The credit crunch is the No. 1 issue," said Klaus Wiener, chief economist of Italy's Generali Investments. "Some people say this will be over soon. I think that is not the case."

"We are in a full-blown banking crisis [that) will take quite a while to blow over. We haven't seen all the contagion effects," said Fidelity International fund manager Anthony Bolton.

It is partly for this reason that the US Federal Reserve, European Central Bank and others took joint steps to ensure a system for lending to banks but where questions remain as to whether it is enough.