Credit squeeze will get worse in 2008

Financial institutions face plenty more write-offs this year. However, the big theme of 2008 could well be the triggering of credit default swaps. We look at what the CDS market is - and why it could cause serious contagion.

Consider this, says David Rosenberg of Merrill Lynch: the first 7% down leg in US house prices triggered a 65% year-on-year surge in foreclosures, a 20% plunge in financial stocks and nearly $100bn of writedowns in the banking sector.

So what might another 20%-30% fall do? Prices still look hugely overvalued, inventory has risen, and 1.1 million prime borrowers are in arrears. So financial institutions face plenty more write-offs on mortgage-related securities, with Jan Hatzius of Goldman Sachs recently estimating that US losses could reach $400bn.

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