The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site.

All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.
Banking

Bond Outlook July 25th

It is right to focus on sub-prime related CDOs, but the de facto credit squeeze, with wider spreads and more severe terms for corporate loans will have even wider negative repercussions.

Bond Outlook [by bridport & cie, July 25th 2007]

Moody’s says that the credit rout gives “serious reasons to worry but does not pose a systemic threat”. The Fed’s W. Poole assures that “the impact of the sub-prime problems will be contained to the real estate markets and will not hurt the economy much”.

We disagree. The financial system in the USA has failed and will need revamping, not least with regard to the operations of the rating agencies. The knock-on effects of the sub-prime debacle will have a profoundly negative impact on the economy in the coming months, because:

  • as mortgage defaults accelerate (“Alt A hybrid adjustable-rate mortgages” are defaulting as fast as sub-prime), the decline in house building and prices will dampen household ardour and ability to spend beyond their means
  • the tightening of credit both in spreads and terms and conditions (end of “covenant-lite” and the like) is far from limited to CDOs, but is extending to the entire apparatus of cheap and readily-available borrowing for leveraged buy-outs

The second point should eventually bring about a stock-market correction, although the ability of equity markets to charge on regardless after corrections of 1 or even 2% in a given day never ceases to amaze us.

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree