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Asian subprime fears grow; Europe calmer

Shares in Singapore’s DBS Group Holdings, state-controlled Bank of China and its Hong Kong subsidiary, BOC Hong Kong, all skidded yesterday after they revealed a combined exposure to the US subprime mortgage market of almost $13 billion.

The news raised fears that Asian banks, generally risk averse following the Asian financial crisis 10 years ago, were more vulnerable to the crisis as investors had thought.

Stock markets tumbled from Sydney to Seoul in response, putting Asia on track for its first losing session since a major fall last Friday.

European stocks followed suit — the FTSEurofirst 300 index of top European shares was down 0.3 per cent at 1,504.38 points as improving confidence was also stopped in its tracks by Countrywide Financial chief Angelo Mozilo’s assessment that the US economy could be dragged into recession.

German Finance Minister Peer Steinbrueck was more upbeat, saying there was no evidence that his country’s banking sector faced further problems from the credit crisis, or that the liquidity crisis was wreaking wider economic damage.

Germany has so far been the hardest hit in Europe by the problems stemming from defaults on US mortgages given to people with weak credit histories.

“From today’s perspective we have in Germany no indication that we’re going to see further shocks in the banking sector,” Steinbrueck told the Rheinische Post daily in an interview. “The experts don’t expect any spillover onto the real economy.”

Last month, German small business lender IKB almost folded until banks stumped up an 8 billion euro ($10.8 billion) credit line to rescue it. A group of banks also gave credit of more than 17 billion euros to help publicly-owned lender SachsenLB survive the credit market turmoil.

Prime Minister Romano Prodi said Italy’s banking system was unscathed ahead of a Bank of Italy report on Monday detailing any exposure to the subprime mortgage crisis.

“The ’tight-fisted’ policy characteristic of our banks in handing out credit has had its advantages,” Prodi was quoted as saying by Il Messaggero newspaper.

In France, BNP Paribas said it would reopen next week three investment funds it had frozen this month, in a step that may help restore investor confidence.

On August 9, BNP Paribas said it had frozen three funds holding about 1.6 billion euros ($2.2 billion) as the US subprime mortgage sector meant it could not value some assets.

“This crisis is without precedent,” Chief Executive Beaudoin Prot told French newspaper Les Echos. “It has put the spotlight on the evolution in the financial industry and the growing weight of disintermediation.”

Some calm restored: The US Federal Reserve and European Central Bank continued to pump money into wobbly credit markets on Thursday, where confidence has been seeping back after a full-blown crisis earlier this month.

Central banks have retored some semblance of calm to markets — despite yesterday’s tumble, Asia stock markets were still on track for their biggest weekly gain in more than 19 years.

“Sentiment has improved compared to where it was a week or two ago but the subprime issue will keep bubbling away under the surface,” said Michael Heffernan, senior client adviser and strategist at Austock Stockbroking.

But Countrywide’s Mozilo, who heads the biggest mortgage lender in the United States, told Reuters the U.S. housing downturn was likely to lead the country into recession.

“I’ve seen this movie before and the ending of the movie always ends up in some form of recession,” he said. “I can see the economy slowing down substantially enough to give the regulators, the Fed, some pause in what’s going to happen.” Bank of America has invested $2 billion in Countrywide, a move aimed at restoring trust in both the ailing mortgage lender and the market.

The Fed, which cuts it bank lending rate last Friday, injected $17.25 billion into the banking system on Thursday, while the European Central Bank was inundated with demand for fresh cash in a money-market tender.

Australia’s central bank added a modest amount of cash to the banking system on yesterday as previous generous injections of cash meant excess balances were already at record highs.