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. Please see our Subscription Terms and Conditions.


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

Against the Tide: It’s not even half-time for the credit crisis

More assets are yet to be hit in the credit crisis and, as leverage continues to fall out of play, liquidity will keep on drying up. Equity prices are bound to fall still further too.

The credit crisis is not over. The move by the Federal Reserve to flood the US credit market with liquidity through its new-fangled term auction facility and term securities lending facility is innovative in its attempt to get credit markets moving again. However, it will fail. The depth of the defaults and the breadth of the crunch are too big for the Fed to absorb.

Indeed, in terms of the hit to the capital of the financial institutions that have invested in the great global asset-backed securities boom, we are not even halfway through the crunch.

The US housing slump and the continuing falls in house prices in Europe have already led to heavy losses in the sub-prime mortgage market. But there are more shoes to fall in the consumer and corporate debt markets as well as in credit insurance instruments. And as the global economy slows, defaults and losses will mount.

Global liquidity is already contracting because securitized debt markets (both asset-backed debt and synthetic debt using derivatives) are shrinking rapidly. Eventually, bank credit will also contract and, with it, so will the global economy.

During the period of economic contraction, financial asset prices previously boosted by cheap leverage will fall.

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