The head of Standard & Poor's, the global credit rating agency, yesterday said he was hopeful the financial markets would recover from the subprime crisis in less than two years if the early signs of confidence were sustainable. Deven Sharma, president of S&P, said in Hong Kong the well-received response to Lehman Brothers' share sale and the further write-down by UBS were 'indications that people think things may be turning around'. 'The question is whether it will sustain,' he said. Global markets rallied after the banks' announcements. But Mr Sharma said the market was driven by sentiment and confidence, which were still down in the United States because of lingering uncertainties. The subprime crisis could worsen depending on market and economic conditions, he said. The rating agency expected the US economy would fall into recession this year and home prices would keep declining. The default rate on high-yield debts would probably rise to about 5 per cent but below the historic peak of 12 per cent in the early 1990s, it said. Mr Sharma said the US economy could recover next year. S&P estimated last month that subprime write-downs could cost global financial firms US$285 billion, but most key players had done the necessary write-downs. Mr Sharma said that as long as central banks in the US and the European Union kept liquidity flowing, confidence should return after the recently proposed reform of the US financial regulatory system unveiled by US Secretary of the Treasury Henry Paulson. Still, some critics said the measures did not address the root of the problem, particularly the extensive use of derivatives products and supervision on credit rating agencies. Credit rating agencies were criticised for assigning excessively high ratings to structured securities and reacting too slowly when defaults began. Some critics were also concerned about possible conflicts of interest as the rating agencies were paid to rate the products. The International Organisation of Securities Commissions, a global regulatory body, recently proposed changes to the code of conduct for credit rating agencies. Mr Sharma said S&P's policy was very solid to ensure its ratings were independent and objective. Even so, it had voluntarily planned 27 initiatives in February, including the hiring of external auditors to conduct periodic reviews of its policy - and these would be made public. The rating agency would also rotate its analysts, enhance transparency and increase investor education.