Bonds issuers spark a new credit concerns. On Thursday Ambac and MBIA shares, the one of the biggest bond insurers drop as Moody’s highlighted possibility that both will lose AAA rating on which they depend. The AAA financial strength rating is important to bond insurers because they effectively transfer their ratings to bond issuers. Any credit rating cut may lead to the downgrade of the USD2.4tr of structured bonds which they guarantee. It might also force the monolines’ counterparties to take big writedowns, as Merrill Lynch did on hedges with below-investment grade bond insurer ACA on Thursday.
Late Friday Ambac lost its AAA rating after Fich downgraded the company and it is highly likely that others will follow which means that another wave of write downs is possible
Forbes brings a story that now these problems are spreading overseas to Europe as well.
Forbes brings a story that now these problems are spreading overseas to Europe as well.
Another confirmation the credit crunch is spreading to Europe brings ECB banking survey released on Friday.
The ECB survey points to sharp tightening in the credit standards and significant decline in demand for credit which confirms that both business and consumers is being hit badly by us credit turmoil.
The chart which I attached shows that global high yield defaults tend to raise 12 month after the willingness to lend (tightening in credit standards) turns back.
So far the global speculative grade defaults rates remains low, around 26 lows but in tight financing conditions they are set to raise.
It shows the credit crunch is spreading out. Credit supply contraction is likely to cause a further downward shift in growth expectations including emerging markets economies. I doubt that smooth transition form high growth scenario to low growth scenario is possible without triggering a volatility shock.
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