A year-long crisis is shaking the foundations of some of the world's mightiest financial bodies and economies, confounding policymakers who now confront an increasingly fragile and uncertain future.

The financial market turmoil that emerged last August as the US housing bubble burst has collided with a surge in energy and food prices along with a toxic combination in the United States and Europe of tepid growth and rising inflation.

The crisis erupted 9 August 2007 when French bank BNP suspended three of its funds, causing short-term credit makets to freeze up and prompting the European Central Bank to inject €95-billion into money markets.

Today, with consumer and business confidence crumbling, governments and central bankers are scrambling to confect measures — official bailouts, tax rebates, lower interest rates, credit injections — to snuff out a perplexing array of economic brush fires that include a threat of recession.

"This crisis is different — a once or twice a century event deeply routed in fears of insolvency of major financial institutions," former US Federal Reserve Chairman Alan Greenspan wrote in a column for the Financial Times on Tuesday.

While many economists maintain that the broader economy can — with difficulty — weather the storm on the markets, there is a strong fear that the global financial architecture remains vulnerable to more upheaval. Initial suggestions that emerging markets would be unscathed are giving way to evidence of global slowdown.

"One year later it's getting worse and worse," said Kenneth Rogoff, a Harvard University professor a former chief economist at the International Monetary Fund.

"There's a lot more restructuring ahead in the financial sector and the global economy has a lot of adjustments to make to the commodities shock."

In the past year fabled financial titans such as banks Merrill Lynch, JPMorgan Chase, Bear Stearns, UBS and Deutsche Bank, as well as the two US mortgage financing behemoths Fannie Mae and Freddie Mac, have all been stung. Some emergency recapitalisations have opened opportunities for investors from emerging markets.

The US housing meltdown was brought on by years of a cheap mortgage credit that left many homeowners facing huge debt they were unable to refinance when real estate prices began to fall.

A subsequent flood of foreclosures undermined the value of billions of dollars in mortgage-backed assets held by the banks, triggering staggering losses and writedowns on the their balance sheets.

The IMF has estimated that banks and financial institutions have written off more than $400-billion on mortgage-related investments and have sustained losses of $945-billion.

In such a climate, the banks in turn have grown markedly less willing to make loans among themselves and to businesses, prompting a worldwide squeeze on credit.

All this in a context of long-standing global imbalances and dollar weakness arising largely from US deficits that economists had long warned would unwind, possibly with vicious corrections.

The IMF in an assessment last month of financial stability, found that "global financial markets continue to be fragile and indicators of systemic risk remain elevated."

A crisis that began with a wave of mortgage foreclosures by subprime — or high-risk — US borrowers has spread to other forms of credit, it said.

Greenspan has said the bloodletting will end "when home prices stabilise and with them the value of equity in homes supporting troubled mortgages."

But Jaime Caruana, head of the IMF's financial markets department, said recently that with a continuing fall in prices "a bottom for the US housing market is not yet visible."

And the New York Times, in an ominous report on Monday, warned that another "far larger" wave of defaults could be on the way, this time by people with "prime" or good credit histories.

The paper quoted JPMorgan Chase Chairperson James Dimon as telling analysts he expected losses on JPMorgan prime loans to triple in the coming months and characterised the outlook as "terrible."

US policymakers, in particular Fed Chairperson Ben Bernanke and Treasury Secretary Henry Paulson, have so far responded with "pump priming" measures, offering consumers 168 billion dollars in tax rebates, slashing interest rates and making Federal Reserve loans available to investment firms and banks.

The measures took concrete shape in an elaborate housing rescue plan signed at the end of July by President George W. Bush, described as the most sweeping housing legislation in decades.

The act provides $300-billion in federal guarantees to help refinance troubled mortgages. It calls for government credit and equity injections in Fannie Mae and Freddie Mac, the two mortgage lenders that underpin much of the housing market, as well as $3.9-billion to help local governments buy and rehabilitate foreclosed homes.

The Fed, the US central bank, has done its part by lowering its benchmark lending rate by 3.25 points between September and late April.

But for some economists the era of easy credit from 2003 onwards was the root of the problem.

"The subprime crisis is a result of massive US borrowing that kept interest rates artificially low in the United States," Rogoff said,

"And that lulled people into thinking that there was no risk because credit was so freely available."

Added Bank of America economist Holger Schmieding: "If the aftermath of 11 September in the United States and the stock market problems worldwide, central banks were inclined to be accommodative."

The Bank for International Settlements in Basel, the policy forum for central banking, concluded in its annual report that the main cause of the crisis was "imprudent and excessive credit growth."

The main lesson for central banks, it suggested, was that they should raise interest rates quickly when asset prices gave early warning of inflation to come.

Washington's response to the crisis, namely its willingness to rescue troubled financial institutions, has therefore unsettled economists who fear that bad habits could be perpetuated.

"The Fed and the US Treasury, by standing behind the big investment banks, are allowing them their highly risky activities at unrealistic interest rates," Rogoff maintained.

"That has to end."

A year ago, on 9 August, 2007, a fund run by French bank BNP Paribas sent distress signals.

The European Central Bank, already alarmed by signs of strain on interest rate markets, intervened by providing emergency funding to eurozone banks.

It was to prove the first of several, and increasingly aggressive, measures by central banks in a titanic and successful battle to prevent a failure of the international banking system.

But the world now faces the aftermath of the storm in the form of slowing growth, to the verge of recession in some countries, and lessons arising from what went wrong and what was done in response.

The problem that shook the markets of the world had been rumbling for many months in the market for mortgages for people in the United States with modest means, tempted by low interest rates and seemingly ever-rising house prices.

Banks which sold them loans then repackaged future repayments and sold them as so-called securitised paper with good credit ratings to investment houses around the world...until the interest rates rose and house prices fell.

US interest rates rose from 1.0 percent to 5.35 percent from 2004 to 2006. Here are some of the key dates in the financial crisis which then spread like wildfire across borders.

February 2007: The US subprime mortgage sector shows signs of strain.

June 2007: Wall Street investment bank Bear Stearns is the banking world's first high-profile sub-prime casualty. It tells investors that they will get little, if any, of the money invested in two of its hedge funds after rival banks refuse to help it bail them out.

July: Germany's IKB bank falls into crisis as investors pull money out of IKB-managed Rhineland Funding, which is exposed to shaky US real estate loans.

Aug 3: Shares fall heavily on fears of sub-prime losses and a global credit crunch.

Aug 9: The scale of the credit crisis emerges when the European Central Bank injects €94.8-billion ($146.7-billion) into the euro money supply, after BNP Paribas, France's biggest bank, says it had suspended three of its funds that were exposed to the US mortgage crisis.

The US Federal Reserve and the Bank of Japan take similar steps, in the first of several interventions by central banks.

"This is the day the world changed," according to Adam Applegarth, then chief executive of British morgage lender Northern Rock.

Aug 10: Global equity prices plunge again.

Sept: Britain's fifth largest mortgage lender Northern Rock is rescued by the Bank of England, prompting savers to queue up to retrieve their money in the first run on a British bank for 140 years.

Sept: Banks begin writing off losses, in billions and some cases, tens of billion fo dollars and euros. Among many others, Citibank eventually writes off about $50-billion. Union Bank Suisse (UBS) writes down over $37-billion, while France's Credit Agricole writes off €4.2-billion.

Jan 2008: The US economy succumbes to housing and credit troubles in December as just 18,000 jobs are added and the unemployment rate rises to 5.0 percent, highlighting fears of recession.

Jan 22: The US Federal Reserve cuts its key federal funds short-term interest rate by three quarters of a percentage point to 3.50 percent.

Feb 17: Britain's ailing mortgage lender Northern Rock is nationalised after the government acquires all the bank's shares.

March 11: Central banks make another coordinated attempt to ease conditions in the credit markets by announcing $200-billion of new emergency lending for banks.

March 16: US banking giant JPMorgan Chase takes over crisis-hit investment bank Bear Stearns for $236-million, a fraction of its share price, in a deal backed by $30-billion in Fed loans.

July 2008: California mortgage financier IndyMac fails and is rescued. Fannie and Freddie. Pressure mounts on Freddie Mac and Fannie MAe, the US sponsored mortgage financiers, forcing the US Treasury to announce a rescue plan.

Stocks plunge again. Late July: Merrill Lynch dumps distressed mortgage assets and raises fresh capital.

August 5: The former chairperson of the US Federal Reserve, Alan Greenspan, tells the Financial Times: "This crisis is different — a once or twice a century event deeply rooted in fears of insolvency of major financial institutions."

The following are comments made to AFP by economists on the origin and nature of global financial turmoil.

Elie Cohen, research director at France's CNRS:

It's an American crisis and a European crisis. But I am sure it will soon be an Asian crisis in the sense that there will also be an economic slowdown in Asia.

Holger Schmieding, Bank of America:

Too many people had taken mortgages at low interest rates and very easy conditions, which they could no longer afford at higher interest rates.

The real cheap money period was from from 2003 onwards. It was there because inflation was very low and the central banks were afraid of deflation and in the aftermath of the September 11 in the United States and the stock market problems worldwide, central banks were inclined to be very accommodative.

Veronique Riches-Flores, Chief European Economist, Societe Generale:

There was a credit bubble, an excess of liquidity that carried over into asset prices — real estate, shares, bonds ...

Kenneth Rogoff, professor, Harvard University, former IMF chief economist:

The subprime crisis was the canary in the coal mine. If it hadn't been the subprime crisis, it would have been something else. The global economy and the financial system were headed for a fall.

The subprime crisis is a result of the massive US borrowing that kept interest rates artificially low in the United States ... and that lulled people into thinking there was no risk because credit was so freely available ...

When one big bank has a problem it's trying to convince us that it's a world problem, so that the government bails it out.

They want to get low interest rates loans from taxpayers, they want direct access to the Fed's discount window without any quid pro quo, any real regulation ...

The Fed and the US Treasury by standing behind the big investment banks is allowing them their highly risky activities at unrealistic interest rates.

Claudio Borio, head of research and policy analysis, Bank for International Settlements, in a personal study released in May:

It already threatens to become one of the defining economic moments of the 21st century...

The unfolding market turmoil is best seen as a natural result of a prolonged period of generalised and aggressive risk-taking, which happened to have the subprime market at its epicentre.

AFP

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