Analysis of a special sequence of events - the crisis on the secondary mortgage market and its consequences (also for Hungary)

This paper provides an overview of the antecedents, main triggers and spillover mechanisms of the turbulence emanating from the United States sub-prime market in the summer of 2007. Its primary goal is to discuss the facts and interrelationships featured in the various analyses and statistics, using a uniform, non-standard approach, to separate the 'centre' from the 'periphery' in terms of the impact of contagion, and to understand causes and effects. It is found that the primary causes of the turmoil were a persistently low international interest-rate environment and financial imbalances caused by globalization. The combination of rapid house-price inflation and asset price rises due to securitization of sub-prime mortgages (the origination and distribution model), coupled with the bursting of bubbles, were responsible for the severity of the distress. The spillover, in turn, was a consequence of increased international financial integration. One innovation in the paper is detailed analysis of the channel of contagion within financial integration: a major role at the epicentre was played by a confidence crisis, coupled with turbulence in inter-bank markets, while the triggers on the periphery were internal vulnerability, rises in risk premiums, and reduced access to credit.