KEY POINTS:
Investment bank Goldman Sachs estimates global credit losses stemming from market turmoil will reach US$1.2 trillion ($1.5 trillion), with Wall St companies bearing about $460 billion of that total.
US financial firms have reported writedowns of about US$120 billion, little over one quarter of the total Goldman estimates they will eventually suffer, suggesting there is much more pain to come before any respite.
Losses from these firms which include banks, broker-dealers, hedge funds and government-sponsored enterprises, are crucial because they have led to a dramatic pullback in credit availability as they have pared lending to shore up their capital and preserve their capital requirements, Goldman said in a research note released on Monday.
"US leveraged institutions have written off less than half of the losses associated with the bursting of the credit bubble," they said. "There is light at the end of the tunnel, but it is still rather dim."
Goldman Sachs JBWere economist Shamubeel Eaqub said the report was significant for New Zealand because it indicated the global credit market pressure, which has already resulted in higher lending costs for home buyers and other borrowers, was unlikely to abate soon, and might get worse. "We haven't seen the end of it. There is quite a lot of product out there and we don't know who holds it - in a nutshell that's the whole problem.
"No one wants to own up and say 'I own X per cent of the bad debt out there' and expose their positions."
Until there was certainty about which institutions were holding bad debt and how much, credit spreads would remain at current levels or worsen.
Westpac senior economist Doug Steel said Goldman Sachs' report was consistent with his bank's view. "We do think there is more bad news to come and these numbers would certainly back that up. We're certainly far from out of the woods yet."
Eaqub said the direct impact for New Zealand was that not only were banks passing on the increased cost of money, but they were also becoming more risk averse and both effects would drag on the economy.
"In the last few years we had very easy credit conditions and a lot of lower-quality borrowers were able to access that source of easy money which added impetus to the economic growth rate.
"That's now gone, and if anything it is likely to reverse and we will see the opposite side of the same coin.
This house of cards that we've built over the last few years on easy credit looks quite vulnerable."
News of the potential extent of the credit crunch losses had come at the worst possible time, with the domestic sector slowing. "It's going to be pretty tough in terms of having much growth in the first half of this year and talk of recession will intensify," Eaqub said.
The Goldman report estimated that of Wall St's cumulative losses, about half would be on bad residential home loans, while poor-performing commercial mortgages would represent 15 to 20 per cent. The rest of the losses would come from credit card loans, car loans, commercial and industrial lending and non-financial corporate bonds.
Facing more credit losses, leveraged institutions have raised about US$100 billion in new capital from domestic and foreign investors and reduced dividend payouts. This amount was more than three-quarters of the write-offs to date, the report said.
