Awash with Cash 9: After the "credit run"
Tue, Sep 11 2007, 08:22 GMT
by Allan von Mehren, Carsten Valgreen
- The present financial market crisis is not just about US sub-prime mortgages. It is about deleveraging after a period of extremely easy financial conditions, about faith in credit rating? agencies and it is about trust in the system of complex fixed income products built up over a number of years.
- We benchmark the crisis against similar financial distress in 1987, 1998 and 2001. This crisis resembles 1998 the most, with the difference being that the present crisis seems more systemic and in that sense more fundamental. We think it could be called a “credit run” - a “bank run” in a modern version.
- In financial markets the crisis could mark a watershed. As in 1987 and 1998 the crisis marks a rising trend in equity volatility. We think risk aversion will increase permanently, even as the dust settles. In a sense it marks the end of the “awash with cash” period. From now on perceptions of risk will change and markets will scrutinise lending and positions much more. This means credit spreads are not likely to come back to the same tight levels and swap spreads will likely stay wide for some time. And it also implies permanently higher risks of an emerging market crisis.
