Friday, April 24, 2009

Far From Over

Floyd Norris writing in the NY Times reminds us that the problems in the U.S. financial sector are far from over:
The loans went to borrowers who might never before have been allowed to borrow. When they found repayment difficult, they were permitted to refinance their loans, generating fees for the lenders and postponing the ultimate reckoning. Then the credit markets turned and both the borrowers and lenders were in deep trouble.

So it went with the subprime mortgage crisis. And so it is now going with corporate loans and bonds. It appears that defaults on leveraged loans and corporate bonds will soon rise to levels not seen since the Great Depression.
Read the rest here. The problems with corporate debt can be seen in the figure below which shows the difference between interest rates on BAA-rated corporate bonds and AAA-rated corporate bonds. Since the BAA-rated securities are riskier, the spread between these two yields provides a glimpse into the market's assessment of corporate risk. (Click on figure to enlarge.)

Can the U.S. financial system handle more shocks?

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