Worsening credit squeeze bodes ill for growth
Nov 30, 2007
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Equity markets remain under pressure as jitters over subprime exposure are still rattling money and credit markets. It feels like August, says Edward Hadas on Breakingviews.
The European Central Bank has announced further liquidity injections in order to help lower interbank rates; the spread between the three-month interbank rate and the base rate in the eurozone has risen to 0.8% in the past two weeks, while sterling and dollar rates have also jumped.
Goldman Sachs says HSBC may need to make additional provisions worth $12bn for its subprime exposure, while HSBC announced it would provide $35bn to bail out its two structured investment vehicles. SIVs profit from the difference between cheap short-term funding and higher-yielding complex debt products. But funding has dried up and the value of their assets plunged now that investors are unwilling to lend to anything potentially subprime-related.
Trading in the covered bond market, a conduit for mortgage funding in Europe, has been suspended. These had been deemed relatively safe as they are secured against highly rated mortgages and also give investors a further claim against the issuer as they remain on the bank’s balance sheet (unlike SIVs). But liquidity has now dried up as investors fear issuing banks could face large losses on subprime-related assets.
Gummed-up money and credit markets threaten growth: “money is the lubricant” that allows modern economies to function, as Stephen King says in The Independent. “Without it, our economies will simply grind to a halt.”
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