Stiglitz says subprime mortgage crisis may worsen

The US subprime crisis will probably "get worse'' as banks tighten lending rules and borrowing rates increase, Nobel laureate Joseph Stiglitz said.

The subprime fallout has roiled global markets as investors dumped riskier assets and lenders tightened credit. US homes facing foreclosure almost doubled in July as property owners with adjustable-rate mortgages saw their payments rise and were unable to refinance because of the subprime crisis, RealtyTrac Inc said last week.

"People assumed they could roll over their mortgages when the teaser rates ended and they had to pay the full interest rate, because after all the price would go up,'' Stiglitz said in an interview in Kuala Lumpur. "Now credit standards are getting tighter and more people are going to have debt beyond their ability to pay.''

An increase in foreclosures will add more homes to the market and further erode values. US home sales dropped to a four-year low in the second quarter and prices fell in a third of the US cities, according to the National Association of Realtors.

"House prices in the country as a whole are beginning to fall,'' he said. "There's ``a very high probability problems in the subprime markets are going to start showing up in the markets that are a little bit above the subprime.''

The global credit crisis sent benchmark indexes in the US, Europe and Asia to their lowest levels in five months earlier in August after investors withdrew from riskier assets.

Financial institutions, including Barclays Plc and State Street Corp, may be facing losses from units they set up that bought collateralised debt obligations. The credit crunch forced central banks to inject money into their financial systems to boost liquidity.

"These toxic subprime mortgages - the result of predatory lending where financial institutions took advantage of the least-informed Americans - were hidden in all kinds of complicated financial products and shipped overseas,'' he said. "People are discovering all over the world that they own billions of dollars'' of such products.

Investors will demand higher yields to hold fixed-income assets they deem risky, said Stiglitz, who is in Kuala Lumpur to present a lecture organised by Khazanah Global Lectures.

"The countries which are most adversely affected are the countries such as Indonesia,'' he said. "The overall risk premia will go up and those countries, innocent bystanders to this crisis which are viewed to be somewhat riskier, will find that markets will demand higher rates.''

Stiglitz won the Nobel prize for economics in 2001.