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NEW YORK, LONDON - Billionaire investor George Soros has given warning that the US is on the brink of a slowdown far more serious than the Federal Reserve is expecting.
Mr Soros said during a lecture at the New York University this week that the American economy is "on the verge of a very serious economic correction" after decades of overspending.
His statements have caused disquiet among investors and central bankers, as Mr Soros made US$1 billion by betting against the Bank of England in 1992.
"I think we are definitely in for a slowdown that I think will be a bigger slowdown than (Fed Chairman Ben) Bernanke is seeing," he said.
"We have borrowed an awful lot of money and now the bill is coming to us and the war on terror has thrown America out of the rails."
Bleak warnings of more pain to come in the credit sphere snowballed on Tuesday and fears of subprime losses yet to be unearthed has rattled money markets.
Bank of England Governor Mervyn King said it would take months for banks to reveal their full losses stemming from risky mortgages and former Federal Reserve chief Alan Greenspan said the housing debacle was a major risk to the US economy.
Red ink flowed as IndyMac Bancorp, one of the largest independent US mortgage lenders, posted a third-quarter net loss of US$202.7 million due to mounting delinquencies and a collapse in investor demand to buy its home loans.
The loss was five times larger than it had projected, giving life to investor fears of more skeletons in the financial sector's closet. Emblematic of the market's mood, Goldman Sachs had to deny swirling rumors that it may need to write down mortgage-related losses.
International Monetary Fund chief economist Simon Johnson said financial market anxiety may have entered a second phase that could cause more credit tightening. Meanwhile, BoE's King reminded investors the banking sector had a long slog ahead.
"I think most people expect that we have several more months to get through before the banks have revealed all the losses that have occurred, and have taken measures to finance their obligations that result from that, but we're going in the right direction," he said in an interview with the BBC.
As fears rise of more balance-sheet shock, economists worry that the deteriorating value of the mortgage debt and derivatives banks hold will choke off the traditional lending they do to the rest of the economy, dragging down growth.
Rising money market rates showed heightened concern among banks about the credit-worthiness of their counterparts.
London interbank offered rates for dollar deposits posted their biggest increase since late September.
"We are watching the credit markets with concern," said Johnson at the IMF.
In Europe, Germany's Commerzbank posted a third quarter net profit of 339 million euros (US$493 million) after writing off 291 million euros of assets exposed to the market for risky US mortgages.
Others have already announced far bigger hits.
The head of US banking giant Citigroup quit on Sunday, taking the blame for expected losses of US$8-11 billion before taxes, on top of US$6.5 billion it wrote off three weeks ago.
Charles Prince's departure came five days after Merrill Lynch & Co ousted its chief executive, Stanley O'Neal, following an US$8.4 billion write-down there.
Citigroup on Tuesday named Richard Stuckey, who helped stabilise the Long-Term Capital Management LP hedge fund, to fix its troubled subprime mortgage portfolio.
Estimates of eventual total losses vary but all the figures put forward are staggering.
JPMorgan thinks the financial services industry is sitting on US$60 billion in undisclosed losses. Bill Gross, chief investment officer at the world's No. 1 bond fund PIMCO, characterises the subprime crisis as a "US$1 trillion problem."
Greenspan said about US$900 billion of subprime mortgages had been securitised into fixed-income instruments, and the excess level of unsold homes was driving price declines that are eroding the value of the securities backed by those mortgages.
"The critical issue on the whole subprime, and by extension the whole financial system, rests very narrowly on getting rid of probably 200,000-300,000 excess units in inventories in the United States," he said.
Mr Soros, during his lecture, had declined to nominate which currencies were more vulnerable currently.
He also declined to comment specifically on the dollar.
"I know exactly where the currencies are going to but I'm not going to tell that to you," he told the audience.
Last week, investment guru Jim Rogers, who co-founded the Quantum Fund with Soros in the 1970s, recommended selling the dollar as well as US investment banks and US housing stocks.
Soros said that, for now, China is the "absolute winner" in economic terms, and will continue to see its economy soaring during the next few years.
"Now it is going through this fantastic transformation but in 10 years time I think you may well have a financial crisis in China," he said.
- REUTERS
