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S&P warns sub-prime losses may hit $265bn

By Angela Monaghan
Last Updated: 1:34am GMT 01/02/2008

Losses from securities backed by sub-prime mortgages could balloon to more than $265bn (£133bn), ratings agency Standard & Poor's has warned.

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S&P has downgraded or placed on credit watch $534bn (£268bn) worth of assets related to the ailing US sub-prime mortgage market, which the agency has warned will trigger further write-downs by a swathe of banks.

The agency, which has itself faced criticism over the ratings it gave some sub-prime debt, expects that a further $175bn (£88bn) will be written down by US banks and other financial institutions.

About 46pc of the securities backed by sub-prime loans that it rated in 2006 and during the first half of 2007 have now been downgraded or placed on credit watch. Thirty-five per cent of its outstanding rated collateralised debt obligations have also been placed on credit watch.

Announcing the changes S&P warned: "Many investors whose investment guidelines do not allow them to hold lower rated instruments could be forced to divest, creating the potential for an imbalance in the markets."

However, S&P is not expecting the big banks and institutions that have already written the $90bn to reveal any more sub-prime related losses. Instead, the agency reckons the losses will be incurred by smaller players "that have yet to feel the full extent of the value impairments on securities held", as well as some of the large European banks that have not yet reported.

In the US, the losses will move to regional banks, credit unions and federal home loan banks and some of the Asian banks are also exposed.

S&P said that its review lead to some of the banks being re-rated, although most likely that would be limited to a "one-notch downgrade."

It added: "Another issue is the potential for a ripple impact on the broader financial markets. It is difficult to predict the magnitude of any such effect, but we believe it will have implications for trading revenues, general business activity, and liquidity for the banks."

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/31/bcnsub131.xml