Assessing the new subprime as watchdogs cry ‘bubble’

Otmane El Rhazi : As global watchdogs warn that euphoric financial markets are divorced from economic reality and acting out some reprise of the credit bubble and bust of the past decade, fears of another subprime timebomb are inevitable.

But even if you believe another crisis is brewing, it’s most likely not where it was last time. At least not in U.S. securitised mortgages – the heart of systemic blowout that nearly brought down the global banking system in 2008.

A mix of tighter regulation, stricter underwriting standards and the lowest new mortgage applications in almost 20 years means sales of private U.S. mortgage-backed securities have dwindled to just $600 million so far this year – a mere sliver of the record $726 billion of new bonds in 2005.

For what it’s worth, new U.S. bonds backed by subprime mortgages have all but vanished. Bonds backed by subprime U.S. auto-loans have taken up some of the running, but not on anything like the same scale.

Yet in its latest annual report the Bank for International Settlements, the Basel-based forum for the world’s major central banks, seemed pretty convinced global debt markets are once again in risky territory and heading for a fall.

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