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A in China named Turbo wonders why problems with subprime loans in America can influence world markets.
Subprime are loans to people who may not have enough to repay them. These and other risky housing loans often grouped with other mortgages and sold as debt .
Investors all over the world have bought bonds other securities based on subprime mortgages as a way earn higher returns.
Sometimes, the investors are banks want to spread their risk by investing in several countries. What happened in late July to a German , however, is an example of spreading risk with bad .
IKB Deutsche Industriebank had put money into American securities, including some based on subprime loans. Some of loans started to fail.
The bank was in danger not being able to pay its short-term debts. Other banks, led by the government-owned KfW Group, agreed to almost five billion dollars to aid IKB.
In early , the French bank BNP Paribas had to temporarily bar from withdrawing money from three investment funds. Their value by twenty percent in less than two weeks. The blamed difficulties in valuing its holdings in the subprime .
Worries over subprime loans have hurt even some the biggest lenders in the United States. On August , the nation's biggest housing lender, Countrywide Financial, had to to banks to finance its short-term debt. Normally the would raise the money in financial markets.
Many took as a sign that investors were becoming unwilling to short-term loans to companies. Especially companies involved with subprime .
A shrinking debt market, a credit crunch, affect stock markets. Not only have subprime losses hurt stocks. Many companies depend on credit. Private equity groups use borrowed money to finance buyouts of publicly traded . Hedge funds also use borrowed money for their investment .
In an effort to calm financial markets, the Reserve two weeks ago cut the rate it charges to borrow money. Many investors hope the central bank cut its main short-term interest rate when policymakers meet September eighteenth.
And that's the VOA Special English Economics , written by Mario Ritter. I'm Steve Ember.
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