By Lee Hyo-sik
Staff Reporter
The United States may soon fall into another round of loan defaults on the consumer credit market in the wake of the ongoing subprime mortgage debacle, according to the Korea Center for International Finance (KCIF) Thursday.
The center said that a growing number of U.S. consumers are failing to pay interest on credit cards and automobile loans amid a worsening job market, adding that if the default rates continue to go up, it could rattle the U.S. financial market.
``If the U.S. trend of consumer loan defaults worsens, it could also spread to the broader economy, which would create negative ripple effects across the globe. We need to closely monitor the situation,'' the KCIF said.
The default rate on U.S. consumer loans has shown an upward curve since 2006 and in particular, since the third quarter of last year, when the high-risk home-backed loan crisis erupted.
The center said the consumer loan default rate stood at 3.14 percent in the third quarter of 2007, up 0.15 percentage points from a year earlier, totaling $5.5 billion.
``If consumer loans go bad, the effect will be much more devastating than that of the ongoing subprime mortgage defaults, as outstanding U.S. consumer loans reach $2.5 trillion, twice as much as the estimated $1.25 trillion of high-risk housing loans,'' it noted.
The center projected that the U.S. consumer loan market will continue to deteriorate for the time being as consumers have less disposable income because of falling home prices, and worsening job market amid a liquidity shortage.
``Rising default rates on consumer loans, paired with the ongoing subprime mortgage market turmoil, will likely further push the world's largest economy downward. It will dampen consumer spending, a main driver of the U.S. economy, and then reduce industrial production and investment,'' the KCIF said.
First, lenders that extended loans to consumers will be hit hard. Then financial institutions, including hedge funds and pension funds, which purchased consumer loan-backed securities for higher returns, could incur huge losses and be forced to write off such losses in the same way as Citigroup and other U.S. investment banks had to write off billions of dollars from their investments into the subprime lending market.
``Korea must closely follow what is happening in the U.S. consumer loan market and analyze its effects on the world's largest economy to better cope with its fallout on the local financial market and the economy,'' the center said.