Impact of US Credit Crunch on Global Economy - Essay Example

Lenders were also looking for borrowers even with lesser creditworthiness but new house buyers. Interest rate was already slashed from 5% to 0.75% in 11 installments. They were ready with exotic offers such as 'interest only' loans or 'option adjustable rate' mortgage (option ARMs). These loans were attractive because of low down payment but later the payment was to skyrocket. Banks wrote in average1% of option ARMs all mortgages in 2003 that went up to 15% by 2006. In certain American communities the option was one in every three mortgages written.

By 2006 brokers were accountable for 80% of all mortgages originated. Brokers advocated hard for the option ARMs because that was highly profitable for banks and high commission fetching for the brokers. Banks had another advantage to bundle up many mortgages to sell them to investment funds; hedge funds, which used these as collateral for highly leveraged loans. The mortgages bundles were highly unregulated and not properly verified for credit worthiness. Investors who were holding these mortgage- backed bonds were at risk of losing high as a result of home loans given to people with poor credit profile.

Since 2001 banks' credits have gone up 83% to$14.9 trillion and the total mortgage debt is up106% over the last six and a half years. There were millions of sub-prime mortgages in USA with reports of about two million of them expected to lose homes to foreclosure according to Pittman 2007. Global economy will have negative repurcussions of the credit crunch in USA. IMF has alreay revised it growth forecast on account of the credit crunch by cutting the growth rate of UK to 1.6% down from 1.8%, and by cutting down the euro zone growth to 1.4% from 1.6% ad that of US itself from 1.

5% to just 0.5% (IMF world Business outlook) This makes UK to sustain the higest growth rate in the face of crdit crunch. IMF has revised its forecast about the growth of emerging economies down to 6.7% in 2008. This is just 0.2% down which appears egligible with a view to 1% reduction in growth of US economy. This is a correction in IMF estimate of the past when it forecasted major impact on developing economoies of the credt crunch in US.0.8%