Worldwide losses from the American credit crisis could near $1 trillion, the International Monetary Fund said yesterday, reflecting the massive cost of the breakdown in markets for home mortgages and other kinds of debt.
There was a recent report that the problem of the defaults on sub prime loans was two fold: first, mortgage companies lending money based on the financial statement made by the buyer and second; the falsification of income by the buyer.
This means that lending agencies allowed loans to home buyers who were not credit worthy and the risk of defaulting was very high when they borrowed the money.
Now the inevitable huge bankruptcies of home buyers in America has led to major financial meltdown in the United States with severe negative implications in the global financial markets.
The IMF estimated that banks, insurance companies, pension funds, and other kinds of investors will suffer huge losses: $565 billion on U.S. home mortgages, $240 billion on debt backed by commercial real estate such as office buildings and shopping centers, $120 billion on corporate loans such as those used to acquire businesses, and $20 billions on consumer loans such as credit cards.
Those figures add up to $945 billion in losses expected within two years. That would be about $143 for every person on Earth, or $3,100 for every U.S. resident.
Irresponsible behaviour of people borrowing, banks lending without sufficient credit checks and lack of adequate oversight by the US government has unleashed gigantic financial looses, the full extent of the pain and dislocation is hard to comprehend as yet.