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Credit losses in US may cross $3 trillion

Source: PTI
December 12, 2008 18:42 IST
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The world's largest economy US is expected to witness credit losses of a whopping 3.1 trillion dollars, as the country experiences worsening recessionary trends.

"... the total eventual credit losses in the United States are likely to be between $1.7 trillion and $2.2 trillion: at best, a rapid recovery would result in losses of $1.3 trillion; at worst, a protracted recession could see losses as high as $3.1 trillion," global consultancy firm McKinsey said in a recent report.

Currently, American financial institutions have incurred write-offs to the tune of $1 trillion, related to the credit crisis.

McKinsey also cautioned that credit losses could be much higher if another major asset area like "credit default swaps" collapses.

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"The losses will be greater if another major asset area (such as credit default swaps) collapses or if a misguided policy response exacerbates the problems, as it did in Japan during the 1990s.

This range of possible losses represents 10 to 15 per cent of US GDP," the report noted. Last month, the country's National Bureau of Economic Research said the US had entered into a recession in December 2007.

According to the report, the present credit crisis would cut America's real GDP by 3-7 per cent from trend growth.

"If the US economy were to follow the same path it did in the more severe crises, the total lost GDP could be two to three times greater than that estimate," McKinsey noted.

The ongoing economic turmoil has been triggered mainly by the bursting of a residential-mortgage bubble and resultant collapse of the real estate market. As a ripple effect, the developments saw the fall of Wall Street majors like Lehman Brothers and Washington Mutual.

Moreover, the crisis has crimped consumer spending, apart from forcing many companies to announce massive job cuts.

Pointing out that the US economy is more exposed to the real estate market in the present turmoil, the report said that under less extreme conditions, "with the right kind of government intervention, economies can weather even sizable credit crises".

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