Credit crunch was on the OECD Council's agenda

The OECD Secretariat was invited to give their assessment of the current economic situation in OECD Council's meeting on 28th of September 2007.

According to the OECD Secretariat there has been a reversal in real estate and mortgage markets in the US. A change in the business cycle is also being witnessed. However, the situation is complex and impact of the credit crisis to other regions is difficult to assess. Confidence indicators have already started to weaken. Tightening of access to credit will decrease households' consumption. Nevertheless, business sector performance has been solid and there has been no strong decline in stock market.

The Secretariat states that a few factors can be named, that have lead to the present situation in financial markets. Excessive liquidity in the financial markets has been generated by extremely low interest rates in major economies. This led to an explosion of debt especially in the US housing markets.

In addition to easy access to credit, some financial market innovations have changed the nature of lending. This led to a "moral hazard" situation, where importance of borrower quality and the likelihood of repayment for the bank were lower. With new instruments banks securitized their mortgage loans and sold them to investors in a search for higher yield.

Banks are now trying to increase their capital which means tighter lending conditions. According to the Secretariat the situation in the US mortgage market could be getting worse if house prices will fall and as servicing costs related to subprime-loans are increasing.

Further information: Mr. Lauri Taro, tel. +33 1 45 24 71 71

More information on OECD's recent economic analysis: What is the economic outlook for OECD countries? An interim assessment (5th September 2007)(Linkki toiselle web-sivustolle.)

OECD