Debt crisis resembles 2007 subprime crisis - report

FRANKFURT (Reuters) - The debt crisis hitting southern Europe resembles the 2007 subprime crisis more than the financial crisis following the collapse of Lehman Brothers, a report by the Bank for International Settlements said on Sunday.

In its quarterly review, the bank also said investors were concentrating on signs of stress in the financial system and neglecting positive economic data.

“The Greek downgrade on April 27 and the subsequent market reaction may have more in common with the start of the subprime crisis in July 2007 than the collapse of Lehman Brothers in September 2008,” BIS said.

“Rising Libor-OIS spreads and the dislocations in U.S. dollar funding markets recalled events in July-August 2007, when global interbank and money markets began showing clear signs of stress.”

Those spreads remain well below levels seen from August 2007 onwards despite a recent rise.

The report also said investor confidence fell sharply in the past three months amid concern about weaker growth and fiscal problems. Investors lowered their risk exposure and retreated to safe-haven assets.

Concerns about public debt in developed countries, as well as jitters about the state of the financial markets, policy tightening in some emerging markets and political risk, all led investors to question the robustness of global growth, BIS said.

As a result, expectations for monetary policy tightening in advanced economies were pushed back and inflation expectations remained well anchored.

“Against this background of heightened uncertainty, market participants focussed on the deteriorating financial market conditions while often ignoring positive macroeconomic news,” BIS said.

In emerging markets, investors expected more restrictive policies, but uncertainty also increased.

“On the one hand, many of these economies are facing rapid economic growth, currency appreciation and the risk of overheating in asset and property markets,” the study said.

“On the other hand, the growth and inflation outlook has been complicated by the high volatility in commodity prices and the unpredictable effects on economic activity of the euro sovereign debt crisis.”

Euro zone sovereign credit default swaps moved dramatically, but little credit risk was reallocated through CDS markets, the study said.

“Even though outstanding gross volumes of sovereign CDS contracts are significant and have risen over the past year, the net amount of CDS contracts is only about one-tenth of the gross volumes,” BIS said.

“The net amount takes into account that many CDS contracts offset one another and therefore do not result in actual transfer of credit risk.”

Reporting by Sakari Suoninen; Editing by Susan Fenton