US economy is slowing down due to the sub prime crisis. What you mean by sub prime crisis?
The sub-prime mortgage crisis is the major financial crisis of the new millennium whose origin is in theUnited States (US) housing market. The gradual softening of international interest rates during the last few years, coupled with relatively easy liquidity conditions across the world, provided for increased risk appetite of investors leading to expansion in the sub-prime market.
The word ‘sub-prime’ refers to borrowers (who are not rated as ‘prime’) and who do not have a sound track record of repayment of loans. The risks inherent in sub-prime loans were sliced into different components and packaged into a host of securities, referred to as asset-backed securities and collateralised debt obligations (CDOs). When interest rates rose leading to defaults in the housing sector, the value of the underlying loans declined along with the price of these products. Institutions were saddled with illiquid and value-eroded instruments, leading to liquidity crunch; the crisis in the credit market subsequently spread to the money market as well. The policy response in the US and the Euro area has been to address the issue of enhancing liquidity as well as to restore the faith in the financial system. The sub-prime crisis has also impacted the emerging economies, depending on their exposure to the sub-prime and the related assets.
The sub-prime mortgage crisis is the major financial crisis of the new millennium whose origin is in theUnited States (US) housing market. The gradual softening of international interest rates during the last few years, coupled with relatively easy liquidity conditions across the world, provided for increased risk appetite of investors leading to expansion in the sub-prime market.
The word ‘sub-prime’ refers to borrowers (who are not rated as ‘prime’) and who do not have a sound track record of repayment of loans. The risks inherent in sub-prime loans were sliced into different components and packaged into a host of securities, referred to as asset-backed securities and collateralised debt obligations (CDOs). When interest rates rose leading to defaults in the housing sector, the value of the underlying loans declined along with the price of these products. Institutions were saddled with illiquid and value-eroded instruments, leading to liquidity crunch; the crisis in the credit market subsequently spread to the money market as well. The policy response in the US and the Euro area has been to address the issue of enhancing liquidity as well as to restore the faith in the financial system. The sub-prime crisis has also impacted the emerging economies, depending on their exposure to the sub-prime and the related assets.
India has remained relatively insulated from this crisis. The banks and financial institutions in India do not have marked exposure to the sub-prime and related assets in matured markets. Further, India’s gradual approach to the financial sector reforms process, with the building of appropriate safe-guards to ensure stability, has played a positive role in keeping India immune from such shocks.
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