Paulson: U.S. home prices to fall

2/07/2008 - 16:02

LONDON (Reuters) - U.S. Treasury Secretary Henry Paulson said on Wednesday that high oil prices, further home price declines and capital markets turmoil will prolong the American economy's slowdown, while Europe and the UK were also showing signs of slower growth.

Paulson, in remarks prepared for delivery to the Chatham House think tank here, said U.S. home foreclosures will remain elevated and "we should not be surprised at continued reports of falling home prices."

"Today, the U.S. economy is going through a rough period. And while we have seen better growth in Europe over the last few quarters, there are signs of a slowdown in Europe in general and the UK specifically," Paulson said.

"However, emerging economies are expected to continue a period of strong growth, which will support global growth overall."

Paulson's speech largely focused on his plans to strengthen the unwinding process for large insolvent financial institutions to allow "orderly" failures.

Paulson said financial institutions face a tough earnings environment as they adjust to changes brought about by high oil prices and the housing slowdown. He reiterated his call for banks to strengthen balance sheets by raising new capital, de-leveraging or reviewing dividend policies.

He said banks in the United States and the UK have raised capital equal to 95 and 96 percent of their recognized credit losses, respectively, but in continental Europe, institutions have covered only 56 percent of recognized losses with new capital so far.

"There is no easy solution that will immediately relieve current financial market stress or protect against future problems and market challenges which will inevitably occur," he said.

Paulson was in London on the final leg of a five-day trip to Russia, Germany and Britain to meet political leaders, finance chiefs and central bankers to discuss economic and trade issues.

(Reporting by David Lawder; editing by Stephen Nisbet)

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