Mortgage woes: the worst may be yet to come

THE International Monetary Fund has warned the world to look out. It says the financial crisis that began in the US mortgage market is spreading deeper into other countries and other forms of debt - and countries that rely on foreign borrowing are vulnerable.

As the Australian stockmarket fell heavily for the third day in a row and the National Australia Bank reported that business confidence is at its lowest level since the 1991 recession, the IMF warned that falling house prices could lead to widespread losses in Western countries.

In a terse three-page update to its April report, Global Financial Stability, the IMF did not mention Australia. But it warned that global investors had become wary about where they park their money and were demanding higher premiums to lend to countries with current account deficits higher than 5% of GDP.

Australia's deficit is 6.25% of GDP, and its banks are already paying steeply higher premiums on global and Australian markets, which they pass on to home buyers and other lenders through frequent rate rises.

The IMF's warning hints that there could be more of that to come. It also warned that the crisis could spread to emerging countries such as China - the rock of the world economy - as finance becomes harder to get and inflation rises.

The IMF statement triggered further selling of shares in the major Australian banks yesterday. Commonwealth shares took the biggest hit, ping 4.31%. NAB shares lost almost 4%.

The NAB survey found that although business confidence and actual conditions both deteriorated in the June quarter, confidence is at a 17-year low but conditions remain positive, although worsening.

The NAB lowered its forecast for GDP growth in 2009 to 2.25%. But there would be a silver lining for home buyers, with the Reserve expected to cut interest rates heavily and slice $100 a month off the typical mortgage.

Starbucks yesterday became the latest employer to announce big job losses, saying it will close 61 of its 85 Australian stores.

But Starbucks is also closing 600 stores in the US. The faltering US economy suffered more bad news yesterday with projections of a record $US482 billion ($A504 billion) budget deficit next year - equivalent to 3.3% of GDP - and the IMF warning that the housing market is nowhere near its bottom yet.

US Office of Management and Budget director Jim Nussle said the stimulus package, designed to help the US economy avoid recession, and the slowing economy were responsible for the budget gap, the worst since the 1980s.

The US is widely seen to be on the brink of recession. The IMF update also described global markets as fragile.

"While the sub-prime mortgage exposures had been factored into most investors' balance sheets, the growing concern is that, with delinquencies and foreclosures in the US housing market rising sharply, and house prices continuing to fall, loan deterioration is becoming widespread," it warned.

The weakness in housing had spread to other OECD countries, it said, "prompting concerns over future loan losses in the mortgage, construction and commercial property areas".

The IMF stuck to its April forecast that combined losses from the market meltdown would total about $A1 trillion.

KEY POINTS

? Countries such as Australia that rely on overseas borrowing are vulnerable, the IMF says.

? Higher borrowing costs passed on as higher interest rates.

? IMF warns crisis may spread to global economic driver China.