Davos: Political leaders and senior bankers said the worst was yet to come from the financial crisis as the US real estate market deteriorated, European banks owned up to more losses, and US emergency stimulus measures fell short.
"It will be a while before you see a return of normalcy in banking and [capital] markets," Merrill Lynch CEO John Thain said yesterday in Davos.
Troubles in the US housing market were likely to worsen this year, with interest rate cuts and a hefty fiscal stimulus package unlikely to offset downside pressures, he said.
Thain said he was not worried about further losses at his own bank, which reported $16 billion in mortgage related writedowns and adjustment this month.
Pessimistic
But in one of the most pessimistic public assessments of the short-term US outlook from a senior banker, he told a panel discussion he saw more trouble ahead for the broader economy.
His comments were echoed by Japanese Prime Minister Yasuo Fukuda, who said the world's economy faced growing downside risks against a backdrop of the US subprime issues and a record rise of oil prices.
"There is no need for excessive pessimism. At the same time, however, we should respond quickly and should implement necessary measures," he said in Davos, adding Group of Seven finance chiefs would discuss the credit turmoil when they meet in Tokyo next month.
Other senior bankers, speaking in Davos under the condition of anonymity, shared Thain's assessment, describing the international banking sector as gripped by uncertainty and fear.
"As we look out into 2008, I think there will continue to be downward pressure on home prices, that will put downward pressure on all mortgage-related securities," Thain said.
"The Fed [rate] cut and the fiscal stimulus package are not going to help declining house prices in the US. That problem is likely to continue."
World Bank President Robert Zoellick said uncertainty pervaded the financial markets and that the impact on the global economy remained unclear. "Some firms are going to have some big losses [and] I don't think this has fully run its course," Zoellick said.
Bert Heemskerk, chief executive of Dutch bank Rabobank, said European banks faced worse losses from the credit crisis.
"Quite a few banks are heavily involved, and in particular if you look at European banks, we have not seen the worst. The news has not been spreading out about the losses that the European banking system has to take," Heemskerk said.
Thain, speaking on a panel with IMF Managing Director Dominique Strauss-Kahn and French Finance Minister Christine Lagarde, said he saw problems in credit markets spreading into the consumer sector, with capital markets not returning to past levels in the short term.
But he was more optimistic for the longer-term prospects of the banking sector, battered by tens of billions of dollars in writedowns that forced many of the big names to look abroad for liquidity.
