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No end of the credit crisis in sight

Latest update : 2008-03-27

Top central bankers are pessimistic on a quick ending for the the credit crisis that has shaken financial markets since summer 2007. The tighter financing conditions have also hit takeover and merger activity.

LONDON — Top central bankers warned on Wednesday there was no end in sight to the global credit crunch as the German giant Deutsche Bank said the crisis threatened its profit target for this year.

The credit malaise showed little let-up in the United States as well after bond insurer FGIC said it has stopped writing new business to preserve its capital.

European Central Bank President Jean-Claude Trichet said the turbulence that has gripped financial markets since last summer would probably endure until the U.S. housing market perked up.

"Until conditions in the US housing markets show signs of improvement, the possibility of continuing tensions in structured credit markets cannot be excluded," Trichet told a European Parliament committee.

"Large euro-area banks are likely to face pressure on their revenues on account of lower activity levels in the structured credit markets as well as from a general retrenchment from risk-taking across business lines," he said.

US Treasury Secretary Henry Paulson said housing prices needed to be allowed to continue to drop for now.

"The sooner we work through it, with a minimum of disorder, the sooner we will see home values stabilise, more buyers return to the housing market, and housing will again contribute to economic growth," he told the US Chamber of Commerce.

Europe has not escaped the credit crunch, which first bit in August when banks worldwide clammed up on lending to each other as it dawned on them that they did not know which were dangerously exposed to the US subprime mortgage meltdown.

Securities based on home loans to Americans ill-equipped to pay them back have cost banks hundreds of billions of dollars in write-offs, with more expected to come, and pushed US investment bank Bear Stearns to the brink of collapse.

Backing Trichet's predictions, Deutsche Bank said asset write-downs and disruption to revenues stemming from the credit turmoil could put at risk its profit goal for this year of 8.4 billion euros (13.2 billion US dollars).

"The tone this morning is noticeably more bearish, and indeed Deutsche has effectively given a [very lightly veiled] profit warning for 2008 on further fair value write-downs," RBS credit analysts said in a note to clients.

Money market rates continued to show banks' marked reluctance to lend to each other despite periodic injections of massive liquidity by the world's major central banks.

The interbank cost of borrowing three-month sterling edged up for the 12th session in a row to 6%, its highest since late December, while three-month euro Libor rates rose to 4.72063%, their highest level this year.

Gloomy king

Bank of England Governor Mervyn King was as downbeat as Trichet, saying the credit crunch had entered a new phase.

"The financial crisis has moved into a new and difficult phase. Across the world, confidence in financial markets is fragile," King told a parliamentary committee.

Despite apocalyptic warnings of a new "Great Depression", some confidence has returned on the back of sharp US rate cuts, central banks' efforts to prime money markets with as much liquidity as required and the orchestration of a takeover of Bear Stearns.

But economic data continues to paint a mixed picture — US home sales rose for the first time in seven months in February but home prices tumbled 3% year-on-year in January.

The bond insurer FGIC Corp said it has stopped writing new business to preserve its capital after its exposure to mortgage losses exceeded legal limits. The parent of insurer Financial Guaranty Insurance Co. said it may also raise loss reserves due to litigation related to stricken German lender IKB.

Damage has spread far and wide, hitting takeover and merger activity, too, via tighter financing conditions.

The 20 billion dollar leveraged buyout of US radio station operator Clear Channel Communications Inc. is in jeopardy, with banks increasingly reluctant to provide financing, a source familiar with the situation said on Tuesday.

If the deal falls apart, it would be the latest in a series of leveraged buyouts to fail since the credit crisis began.

In the US junk market, Abitibi Consolidated Co, a unit of Abitibi Bowater Inc., priced 413 million dollors of high-yield notes, in what was just the second deal to be completed in that market this month. Investor appetite for riskier bonds had vanished amid mounting fallout from the global credit crisis, including the near collapse of Bear Stearns in a liquidity crisis over a week ago.

In Europe, the corporate picture brightened.

Corporate morale in Germany posted a surprising rise in March to its highest level in seven months, the Ifo research institute's monthly poll of around 7,000 firms showed on Wednesday, while French business sentiment also rose unexpectedly, reaching its highest level so far this year.

Date created : 2008-03-27