Credit cards could be source of next debt shock

The risk was highlighted by HSBC's third-quarter results last week, in which the bank reported a $3.4 billion writedown on its US consumer finance business, and said it was easing conditions on its credit cards to reduce delinquencies.

Karen Weaver, Deutsche Bank's head of securitisation research, pointed out: "All consumer credit portfolios have enjoyed artificially low losses. You always had the option of extracting home equity. Now we're going to see all consumer credits posting higher losses."

By contrast, said Anthony Thompson, Deutsche's head of US collateralised debt obligations and asset-backed securities (ABS), the commercial mortgage-backed security (CMBS) market was likely to hold up well, for several reasons.

"I don't think CMBS will be the next to fall. Subprime mortgages were the wrong loan to the wrong borrower at the wrong time - no other market has that risk. Commercial mortgages were aggressively sold at tight spreads, so we have seen some widening this year, but CMBS investors are relatively savvy with some skin in the game. They are real gatekeepers of risk."

The underlying market, however, started to cool this week, with the news that the MIT quarterly transaction-based index of US commercial real estate prices fell 2.5% in the third quarter of the year, the first fall since 2003 and the largest fall since 2001.

Rating agency Fitch said earlier this month that the credit card ABS market was "stable", but warned that both credit cards and auto loans could see higher losses in the new year.

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