March 2009
Eurion | Sample Report
EURION
CONSTELLATION
GLOBAL MELTDOWN AND EMERGING
ECONOMIES
Eurion Constellation | Economy Report 2
Genesis of the Subprime Crisis
What initiated as the localized US Subprime crisis (over USD 5 trillion in losses) in the
last quarter of FY 2006, soon saw the world economy in dire straits, toppling the
financial markets worldwide, sending most of the economies into recession, and pushing
marginal countries, like Iceland, virtually on the verge of bankruptcy. The crisis was a
result of blind enthusiasm riding on the back of a decade long rally in property prices
from mid-1990s to 2006 and utter disregard for the fundamental business cycles related
to the real estate markets. During the built-up of the housing bubble, the key market
players carried the misplaced optimism that the property rates would continue to rise
indefinitely, ignoring the fundamental principles of demand & supply and the industry’s
expansion-equilibrium-decline-absorption cycle.
Driven by the climbing oil and food prices in the world markets in 2006, the rate of
inflation accelerated. Almost simultaneously, the oversupply of built-up homes caused
the property prices to slide. Consequently, the cost of the mortgage loans (most of which
were adjustable rate loans) shot up for most borrowers. As a result, the loan to rental
value ratio began increasing considerably. The matters deteriorated, as a sizable number
of homeowners driving the market rally, were the Alt A or subprime loan (for the
borrowers with no, or inferior credit records) borrowers. Rising inflation eroded the
purchasing power of the subprime borrowers, who began defaulting on their loan
repayments. Since, the subprime loans carry higher interest rates than the prime loans,
the lenders found it more profitable to offer large sums to subprime borrowers, during
the phase of rising property prices. The US Government’s encouragement to the
subprime lending, especially through its sponsored organizations, Freddie