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S&P: US COULD SEE STOCK, BAD LOAN-LED CREDIT BUST
HONG KONG (MktNews) - A report released by credit rating agency Standard and Poor's Monday stressed the U.S. economy is vulnerable to a stock-led credit bust and as bad loans in the system build up.
The report, covering various economies, is called "Global Financial System Stress: The Weak, the Vulnerable and those Limping Towards Recovery."
The report said domestic credit to the private sector and non-financial public enterprises in the U.S. has grown rapidly in recent years, rising from 101% of GDP in 1995 to 136% by year-end 1998.
Nonperforming loans at many of the country's largest financial institutions are increasing at a modest pace, it noted, reflecting the aging economic cycle.
Several sectors, including telecommunications and health care, were highlighted for their rapid growth and higher leverage.
"Real estate investment trusts and high-yield portfolios also pose a concern," S&P said.
S&P added that a recent review of large syndicated loans at banks by the Federal Reserve "suggests a two-year trend in increased problem loans, albeit off of historically low levels."
Given the extended duration of the economic expansion, commercial portfolios are "likely to have overly optimistic projections embedded in their repayment scenarios," it added. "These portfolios are not likely to perform well in a weakening economy."
While the banks' consumer portfolios have stabilized, a generally high level of consumer debt and its rapid growth over the past decade "make a potential recession more troubling."
The report also highlighted concerns about the prolonged rise in the stock market, which is being driven, in part, by optimistic projections on technology stocks.
"The resultant asset valuations have been driving high levels of consumer spending; a sharp correction in the stock market could lead to a hard landing for the economy and, thus, for the banks' portfolios."
--Market News, Hong Kong (tel 852-2528-6038) email matthew@mktnews.com
07:16 EST 12/20
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