Central bankers warn sub-prime crisis could hit whole US economy

The crisis in the US housing market risks spreading to the whole of the nation's economy, European Central Bank chief Jean-Claude Trichet said Monday on behalf of world central bankers.
Trichet was speaking in his capacity as head of the G10 group of central bankers from industrialised and emerging economies, who met at the Bank for International Settlements (BIS) here.
"There is a probability of fallout on the real economy in the USA," Trichet said. "We will have to follow very carefully what happens particularly in the USA. We will remain ... alert, (there is) no time for complacency," he added.
High numbers of defaults by high-risk or subprime borrowers in the US housing market sparked widespread fear of a global lack of credit in August, prompting stock markets to plummet. Central banks in turn injected billions of dollars into the global economy.
Trichet said that central banks had an interest in securing market stability but this did not extend to giving lifelines to imprudent investors who have got their fingers burned in the recent turbulence.
"It's certainly the sentiment of central bankers who are around the table that bailing out bad investors would be the worst thing to do," he said. Analysts in the United States said Sunday that the nation's economic outlook had darkened with data showing stalling job growth, which prompted fears the housing slump would lead to a full-blown recession.
Friday's US economic data showed the first contraction in employment in four years, a loss of 4,000 US payroll jobs in August, and flew in the face of most forecasts for slow but steady growth.
"People had been saying that as long as employment holds up, the consumer will be OK" and the economy will keep growing, said Nigel Gault, an economist at Global Insight. "Now that job growth has stopped, we have to question that," he said.
EU Economic and Monetary Affairs Commissioner Joaquin Almunia said last week that the subprime crisis should not have a discernable effect on the European Union's growth in 2007.
He estimated that the fallout from the lending crisis would only slightly dent growth in the 27-nation European bloc in 2008. Trichet also stressed the relative good health of the rest of the global economy outside the United States, and of emerging markets in particular. "The global economy has solid fundamentals," he said.
"Very significant progress has been made in the emerging world. The fundamentals have been considerably improved, progress has been made in fostering local financial markets," the ECB chief added. The ECB last Thursday voted to keep its interest rates on hold amid financial market and credit jitters. The US Federal Reserve was widely expected to trim borrowing costs at a scheduled September 18 meeting.