The dichotomy between bond and equity markets timidly reasserted itself at the beginning of this week as relative calm returned to equity markets, while credit markets worsened, except for top quality bonds. Another dichotomy is now developing: that of sources of (funds) liquidity. Banks (and credit instruments organised through them) are a much reduced source of credit, while surplus countries, many with their sovereign wealth funds, still have massive liquidity available.
Consider first the banks:
The securities left on their books tie up their own equity capital and reduce lending capacity
The pipeline of LBOs had dried up with some 40 planned LBOs pulled during the current crisis, both because the costs to the would-be borrower have gone up and also because banks have every reason to doubt that they can syndicate the loans
Then consider the sovereign wealth funds:
Their first forays into equity markets must have hurt them, but they are so rich...
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