Credit losses may surpass 10 percent of U.S. GDP

Traders work on the floor of the New York Stock Exchange, November 11, 2008. REUTERS/Brendan McDermid

NEW YORK (Reuters) - Credit losses from the financial crisis may exceed even dire estimates of $1.4 trillion, or more than 10 percent of U.S. economic output, according to the chief strategist of research firm CreditSights.

Financial and non-financial loss estimates by the International Monetary Fund and World Bank may be too conservative as the economy weakens and companies and consumers focus on repaying debt, Louise Purtle said on Wednesday.

“What does life after leverage look like?” asked Purtle, during a credit conference in New York. “We’re not prepared for it. The great danger looking into 2009 is being too optimistic.”

Most indicators suggest no easy fix, she said. U.S. existing home sales indicate there are about 1 million extra homes that can’t be sold. Defaults and delinquencies for home loans continue to climb, adding to the 6.9 million foreclosures over the past three years.

U.S. consumer confidence is at its worst levels, exceeding pessimism seen during the 1970s, she said.

“The impact is rolling from the finance sector into the real economy,” said Purtle, who said growth trends point to a 1970s or 1980s-type recession. “We are facing something that is quite different” in terms of the type of recession the U.S. is entering, she said.

One aspect of the current crisis is the slump in consumer sentiment that will weigh on any short-term recovery or rise in home sales. A second characteristic is the difficult unraveling of the huge debt binge undertaken by corporations and consumers over the past decade.

Purtle said the question of whether credit markets are experiencing a reversion to trend in terms of leverage has already been answered.

“The answer is not ‘yes we can,’ but the answer is “yes we are,” she said.

Reporting by Walden Siew; Editing by Tom Hals