World Economic News
'A Whiff of Panic in the High-Yield Markets'
"End of the Party? Why the High-Yield Debt Markets Are Bracing for a Fall" is the title of a full-page feature in the Financial Times March 14, which begins, "Five years to the day after the peak of the last global investment bubble, signs that another one may be about to burst could be seen, ironically enough, in the telecommunications industry." But the problems with a company called Telcordia, and the problem two private firms had in issuing junk bonds to finance its takeover are not isolated; others are having similar problems. The credit boom of the past two years, which has encouraged highly leveraged takeovers and refinancings, may be coming to an end. "Everyone is wondering how long low interest rates can last," said the head of one investment advisory firm.
Last May, "there was a whiff of panic in the high-yield markets," and again in January, the article continues. Now, "the bears are getting louder," as yields are widening. The rest of the Times article is sort of a debate, between those who think that the increase in the volume of credit derivatives makes the system more resilient, and those who think it makes it more vulnerable to "a systemic collapse."
An article in Neue Zuercher Zeitung, Switzerland's financial daily, the same day, is also notable for the frequency of the use of the term "systemic crisis," in the context of discussing the speculative bubble. This article cites the 1998 Russian and LTCM crises, as leading to a meltdown of the settlement system in the U.S.
Bankruptcy Firms Prepare for End of Credit Boom
Bankruptcy firms are preparing for a global credit boom implosion, reported London's Financial Times on its front page March 14. The "global credit boom" of the recent few years, which emerged from the ultra-low prime rates set by leading central banks, is now about to come to an end. The previous week, in part sparked by the ongoing commodity price inflation, yields on U.S. Treasuries increased by the largest weekly margin in one year. While yields on ten-year bonds stood at 4.00% in mid-February, they have now surpassed 4.50%. Interest rates on all kinds of debt titles, including those on corporate bonds and mortgage credits, are going up in line with government bond yields.
The Times notes: "Unusually loose lending conditions have encouraged record borrowing by speculative-grade companies, with leveraged buy-outs and debt refinancing on both sides of the Atlantic generating more than $100 billion of deals in the past eight months. But last week's fall in the price of U.S. Treasury bonds, coinciding with signs that bankers are struggling to complete riskier corporate bonds issues, has added to a sense of nervousness in some quarters." Some in the financial sector "fear the legacy of recent private equity buy-outs and hedge fund investments in distressed debt will be a swath of over-leveraged companies ill-equipped to survive in less benign conditions. PWC [PriceWaterhouseCoopers], the largest corporate recovery adviser, said it was hiring insolvency specialists in sectors such as retailing, utilities, and telecommunications in preparation for the expected fall-out."
A PWC bankruptcy expert is quoted, warning: "You only need one of these really big financing deals to go sour and confidence will evaporate very quickly." Chuck Prince, chief executive of Citigroup, says: "The possibility of a liquidity bubble around the world concerns me."
Asians Cannot Continue Financing U.S. Consumption
Asian savings cannot continue buying U.S. assets, another official of South Korea, the third-largest foreign holder of U.S. Treasuries, commented, Bloomberg wire service reported March 15. "There is widespread recognition that the ongoing trade imbalance between Asia and the U.S.that is, Asian savings financing U.S. consumptioncan't be sustained," Yoon Jeung Hyun, chairman of South Korea's Financial Supervisory Commission, told the Foreign Correspondents' Club in Tokyo.