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Bond Outlook September 12th

The US economy is slowing because of the sub-prime failures, but, as central banks fail to solve the bank liquidity crisis, the credit squeeze will amplify the effect. Recession?

Bond Outlook [by bridport & cie, September 12th 2007]

The knock-on effect on the real economy is becoming apparent (employment losses), so that even Henry Paulson – he who a month ago assured us that the problems would be restricted to the housing market – has understood that this is no short-term crisis, but will require well into 2008 for its solution. Bernanke in the meantime appears deliberately to be playing it cool by giving a speech about trade deficits, Asian savings gluts, US savings shortages and inflation pressures, but with nary a mention of the liquidity crisis.

Already the direct impact of the bursting of the housing bubble (end of remortgaging and using house equity as a source of cash to spend over and above earnings, plus unemployment in housing-related industries) is enough to slow down and possibly stop US GDP growth. Now it is becoming clear that the liquidity problems of banks with their symptoms of a dried-up market for commercial paper and “special investment vehicles” is slowing investment activity and increasing significantly the cost of corporate financing as corporations borrow at high interest from their banks, or who succeed, despite all, in rolling over their CP, but at rates 2 or 3% higher than before the crisis.

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