Credit market risks lurk despite global thaw
Sunday, 25 April 2010
NEW YORK, Apr 24 (Reuters): The global credit crisis may have eased, but the hangover is still punishing some of the largest US borrowers in the credit derivatives market.
Credit default swaps, contracts that insure against debt defaults, are treating debt-laden borrowers ranging from Citigroup to MetLife Inc as though they were rated at junk status, a sign of lingering fears of the risks of heavy debt.
One key cause: in a post-credit crisis world, investors can no longer trust that companies can always refinance debt at affordable rates.
That fear is heightened by trillions of dollars of bank and corporate debt coming due over the next three years, threatening to push interest rates higher as borrowers scramble for funds.
"If you were to look at what the stock market is doing, you would assume we are in some sort of bull market," said Gary Kelly, head of research at Tradition Asiel Securities in New York. "That's not being echoed from the credit perspective."
Credit insurance costs on major US banks have risen by about 17 per cent overall this week, according to data from Tradition Asiel Securities.
JPMorgan Chase's swaps are up nearly 20 per cent, while swaps on the finance arm of General Electric Co are up 11 per cent, according to Markit Intraday.
That contrasts with a more bullish view in stocks, where strong first-quarter earnings have lifted the KBW banks index by more than 6 per cent this week.
Credit default swaps, contracts that insure against debt defaults, are treating debt-laden borrowers ranging from Citigroup to MetLife Inc as though they were rated at junk status, a sign of lingering fears of the risks of heavy debt.
One key cause: in a post-credit crisis world, investors can no longer trust that companies can always refinance debt at affordable rates.
That fear is heightened by trillions of dollars of bank and corporate debt coming due over the next three years, threatening to push interest rates higher as borrowers scramble for funds.
"If you were to look at what the stock market is doing, you would assume we are in some sort of bull market," said Gary Kelly, head of research at Tradition Asiel Securities in New York. "That's not being echoed from the credit perspective."
Credit insurance costs on major US banks have risen by about 17 per cent overall this week, according to data from Tradition Asiel Securities.
JPMorgan Chase's swaps are up nearly 20 per cent, while swaps on the finance arm of General Electric Co are up 11 per cent, according to Markit Intraday.
That contrasts with a more bullish view in stocks, where strong first-quarter earnings have lifted the KBW banks index by more than 6 per cent this week.