The crisis of confidence in credit markets is likely to last longer than any of the financial shocks of the past two decades, Hank Paulson, US treasury secretary, warned yesterday.
He said the uncertainty in credit markets would last longer than the Russian default and Asian crisis of the 1990s - which together stretched over two years - and the Latin American debt crisis of the 1980s.
Mr Paulson was speaking in Washington as Jean-Claude Trichet, the European Central Bank president, warned that it was time for global financial authorities to tackle unregulated entities whose activities had contributed to the latest upheavals.
The comments came as it emerged that credit ratings agencies have been called to a meeting in Washington by the umbrella body for global securities regulators to explain how they rate structured products based on mortgage assets.
Like Mr Trichet, Mr Paulson said the complexity and global distribution of the securities at the heart of the crisis would prolong it. "We expect this period of turbulence to go on for a while," he said. Experts took his statement as a sign that the US authorities foresaw the uncertainty lasting about two years, the rough timeframe for resetting subprime mortgages.
But equities rallied strongly as investor hopes increased that the US Federal Reserve would be forced to make interest rate cuts by up to 50 basis points next week in an effort to stop a slide into a sharp downturn.
The rate cut expectations put pressure on the dollar, which dropped to within touching distance of a record low against the euro. Mr Paulson's warning is one of the starkest from a top policymaker and reflects the difficulties in valuing complex assets tainted by mortgage-backed securities.
"The reason it is going to take longer today [than in previous crises] is that we are more globalised," he said. US mortgages had been "sliced and diced" and were turning up at state-run regional banks in Germany.
"Secondly, it is the level of complexity," he said, adding that he had met bankers trying to value asset-backed commercial paper and other products. "When they are confident they understand the products, confidence will return," he said. - ( Financial Times service )
