Steady deterioration... markets for the week ending 27-Jun-08

Tightened credit standards since the last recession is making life harder for existing borrowers and with inflationary worries that are expecting to send interest rates higher again, the banks ability to be flexible is limited because of higher financing costs on the interbank market.

Troubled areas:
- Britain's untested areas of specialist lending, such as buy-to-let and self-certification mortgages, are coming under stress. Analysts expect 23% of the total stock of British mortgages by value is due to reset in 2008, against a mere 4% of stock in America last year.
- Car-loan defaults may grow as drivers decide to throw their car keys in the same dustbin as their house keys as record fuel costs are also guzzling more of consumer's disposable income.
- Untapped loan commitments to corporate customers continue to crowd out space on bank's balance-sheets, estimated $6 trillion overhang of committed lending facilities to be drawn down, most of it at more generous terms than borrowers could get now.

No surprise given the above, that some of the less well-capitalised UK banks ( AL/, BB/, HBOS) have fallen between 61-76% this year

Scenarios:
- Loan provisions increasing
- Credit cycle goes into a prolonged U-shape recovery instead of V-shape
- Flat or negative GDP growth for 2-4 quarters
- ECB and BOE raises rates due to inflationary pressures
- What more? Oil above $170? may not be impossible with summer round the corner.

Economic Update:
- The U.K. economy grew less than previously estimated in the first quarter, weighed down by the weakest services expansion in 12 years. Overall GDP rose 0.3 percent in the three months through March, the least in three years.
- Royal Bank of Scotland Group Plc, the second-biggest bank in Britain, had its credit rating lowered at Moody's Investors Service, which cited ``higher volatility'' in its securities unit and greater risk of loan defaults in the U.K.

Inflation stories:
- Spanish inflation accelerated to the fastest pace on record in June as oil and food prices surged. Consumer prices rose 5.1 percent from a year ago after increasing 4.7 percent in May
- Inflation in Germany, Europe's largest economy, rose 3.4 percent from a year ago after gaining 3.1 percent in May led by surging energy costs. (more than forecasted)

Eric Tan, London