The fall in house prices towards the end of 2006 and in 2007 resulted in rising defaults on mortgages, especially in the subprime segment. In 2007 and 2008, interest rates will  2  BIS Review 100/2007  increase for a substantial portion of the most recently granted subprime mortgages. This will probably result in a further rise in defaults on these mortgages. Housing starts have also declined considerably. The sharp fall in housing investment has reduced the annual rate of US economic growth by about ¾ percentage point on average over the past year and a half. Housing market developments in the US may result in a more sluggish trend in private consumption and may further amplify the tendency to slower growth in the US, which may spread to the global economy. At the moment, the spillover effects seem to have been moderate and downward revisions of growth estimates have been modest. In the US, more than half of total mortgage debt is securitised and sold to investment managers all over the world. This is one of the largest fixed income markets in the world and accounts in volume terms for almost 10 per cent of global securities debt. Subprime securitised issuance showed a sharp rise in 2004 and increased further in 2005. Estimates of subprime mortgages as a share of the total volume of securitised mortgages in the US are uncertain and vary from 12 to 18 per cent. In the chart, the share is 12 per cent, or USD 665 billion.
But the economic lessons of the past remain relevant. Openness comes with challenges. And as the world grows increasingly interconnected, these challenges will not only be more numerous, but they will also be more varied. Today, the Thai economy again faces challenges from the external front. The main challenge comes in the form of global financial imbalances; another challenge is the threat of high and variable oil prices. By global financial imbalances, I refer to the pattern of savings and investment allocation across the world. At the present, the US economy saves very little relative to its investment needs. Asian and oilproducing economies save more than their domestic investment opportunities. The European Union saves just enough. As a result, the US economy has been borrowing a large sum from Asia and oil producers. The magnitude of capital flows from the rest of the world to the US economy is not sustainable; it is a matter of time before the flows eventually reverse. And, in the process, the US  2  BIS Review 64/2007  dollar will depreciate against various currencies, including the Thai baht. The issue here is not only when the correction will take place, but how fast and how disruptive. Thailand, like many emerging market economies with small and shallow financial markets, is particularly vulnerable to fast-moving international capital. Such rapid movements of capital flows, if vastly out of line with the underlying economic fundamentals, can have negative impacts on the export or import sectors depending on the direction of exchange rate movement.