Over the past six years, Chinese central bankers, French pension-fund managers, and staid German bankers have been the piggy bank for America's housing boom.
In that time, foreign loans to help Americans get mortgages have quadrupled to nearly $1 trillion.
That's one reason soaring foreclosure rates in the US and a sharp slump in the housing market have rattled traders from Frankfurt au Main in Germany to Pitt Street in Sydney, Australia. The prospect of large losses has caused stock markets to tumble worldwide. And central banks have injected billions of dollars to prevent a credit crunch from becoming a financial rout.
On Thursday, there were more signs that the financial markets were trying to cope with the crisis. Instead of just providing overnight liquidity, the Federal Reserve lengthened its cash injection to 14 days. At the same time, Countrywide Financial Corp., the nation's largest mortgage lender, borrowed $11.5 billion from 40 banks. And central banks in Australia and Asia continued to inject funds into their banking system.
In the past, such financial market turmoil would have probably driven the US economy into a recession. "The financial problems may have taken a few banks down and maybe driven the economy into a recession," says Jay Bryson, an international economist at Wachovia Bank in Charlotte, N.C.
However, this time a financial innovation called securitization has allowed the packaging of mortgages and other debt obligations that have been sold to investors around the globe.
"If you allow a bank in France to have a piece of the mortgage market, it should in theory be better because when things go sour everyone takes a little bit of a loss," says Mr. Bryson. "What we've found is that people don't even like these little losses."
•In Canada, the Bank of Canada injected liquidity into the market after a large investment fund, Coventree, sought funding after it could not roll over $1 billion in short term loans.
•In Paris, BNP Paribas froze the assets of three funds that had invested in mortgage-backed securities because it wasn't possible to determine their value. The bank also has loans out to US lender Homebanc, which is in bankruptcy.
•In Germany, IKB Deutsche Industriebank AG was bailed out by a consortium of other German banks, which invested $3.5 billion euros. IKB said it held about $24 billion in subprime mortgages, loans made to people with risky credit. According to press reports, the losses could be up to 20 percent of the portfolio.
•The Swiss investment banker, UBS estimates that the top nine Japanese banks have an exposure of $8.4 billion in subprime loans and may be facing losses of 10 percent of that amount.
Although it's still too early to know how large the total losses will be, Federal Reserve Chairman Ben Bernanke has said they could be as high as $100 billion. In Hong Kong, Dilip Parameswaran, head of Asia Credit Research at the French investment bank Calyon, recently told Bloomberg News the losses could reach $150 billion.
The globalization of America's debt co-incides with the enormous current-account deficit – that is the net trade and interest on debt outflow combined. "We as a country spend more than we produce," says Bryson. "We have been borrowing from the rest of the world."
Some of America's debt is actively sold overseas. For example, officers of Fannie Mae and Freddie Mac make periodic trips abroad to meet with potential investors.
"We actively seek to have a broad investor base in Europe and across Asia," says Jason Lobo, a spokesman for Fannie Mae in Washington. "It helps to insure liquidity in the market."
It's still not clear what the long-term impact of any losses will be on American mortgage rates. "That's the $64 trillion question," says Bryson.
"To the extent we borrow from the rest of the world, if foreigners are less willing to lend to the US, then, yes, long-term interest rates will go up," says Bryson, author of a recent report on the issue. "That's already happening to some extent."
But, he adds, "if foreigners were pulling back, the dollar would be getting creamed, and that is not happening."
In fact, over the past month or two the dollar is up about 2 percent compared with the euro, says David Wyss, chief economist at Standard & Poor's in New York. "That is partially because everyone is buying US Treasury securities," he says.
Mr. Wyss says there are some small signs that the crisis is abating. For example, the insurance that banks can buy on the open market to protect themselves against defaults has become somewhat less expensive. "That's good news, especially for corporate borrowers," he says.
At the same time, he says it's a good sign that banks have agreed to lend $11.5 billion in backup financing to Countrywide. "Basically, it's a sound company," he says. "But they did have to twist arms."
Many international investors probably will have minimal losses, says Bryson. The Chinese and Japanese are mainly invested in mortgages guaranteed by Fannie Mae and Freddie Mac. Instead, the largest potential losses may be in Britain, which owns about $44 billion in mortgage debt.