Credit crunch spreads beyond financial markets

The "credit morass" is deepening, said The Wall Street Journal. Fear has returned to markets as Wall Street banks queue up to reveal further losses on assets related to subprime mortgages; the eight investment banks that have made disclosures have written off $28bn so far. And the bad news is far from over. Defaults and delinquencies are set to increase into next year as low teaser' interest rates on subprime mortgages expire and monthly payments jump.

Meanwhile, most subprime paper is on the balance sheets of insurers, pension funds and other institutions worldwide. Many of these do not report quarterly, and thus have yet to "share their bad investment decisions with us", said The Absolute Return Letter. All told, losses from the "mortgage mess" could reach $1trn, according to Martin Hutchinson on Breakingviews.

The crunch hits America

The idea that the credit crunch could be contained within the financial sector looks ever more fanciful. Evidence that tighter lending standards threaten to slow the economy is mounting. The latest Fed survey of banks' loan officers' intentions paints "a very ugly picture indeed" for households and businesses, said Capital Economics.

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Banks are tightening standards for commercial and industrial loans, while 40% of banks are raising standards on prime, not just subprime, mortgages, up from 14% in the third quarter. Almost 30% are now applying more stringent conditions to non-credit card consumer loans, compared to 12% in the summer. "Without fresh credit, how will the American consumer continue to over-leverage himself?", asked The-rude-awakening.com. A credit squeeze bodes ill for the consumer-driven economy.

and the UK

In Britain, meanwhile, higher interbank rates have prompted banks to rein in credit-card lending. Almost one in ten people had a credit-card application turned down in the six months to September (a 17% increase on the previous half-year), while there have been 125 separate fee and rate increases in the past two months (see page 32). Rejected mortgage applications are up 60% in the past six months, while financial market turbulence has dented confidence and hence housing sales, according to housebuilder Bovis, which now expects its average selling price to fall by 3% this year.

And just as the credit crunch is kicking in, the impact of five rate hikes is coming through, said Edmund Conway in The Daily Telegraph. Retail sales growth slowed to a near 12-month low in October, while a crucial indicator, the purchasing managers' index, showed the lowest growth in the services sector since May 2003. As the outlook darkens, it's becoming clear, as Sean O'Grady said in The Independent, that "the bankers' pain will be shared with us all".