[getsmart-l] Global Credit 'heart attack' Continues

[23 Skidoo]

Credit 'heart attack' strikes China and Korea 
By Ambrose Evans-Pritchard The Telegraph, London Thursday, November 22, 2007 
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/11/21/bcn... 
The global credit crisis has hit Asia with a vengeance for the first time, triggering a massive flight to safety as investors across the region pull out of risky assets. 
Yields on three-month deposits in China and Korea have plummeted to near 1 percent in a spectacular fall over recent days, caused by panic withdrawls from money market funds and credit derivatives. 
"This is a severe warning sign," said Hans Redeker, currency chief at BNP Paribas. "Asia ignored the credit crunch in August but now we're seeing the poison beginning to paralyse the whole global economy," he said. 
Korean and Chinese three-month yields have fallen from 4 percent to 1 percent in a matter of days in a eerie replay of events on Wall Street in late August when flight from banks and the US commercial paper markets caused yields on three-month Treasuries to falls at the fastest rate ever recorded. Asian investors appear to be opting for deposit accounts with government guarantees. 
It is unclear what prompted this latest "heart attack" in the credit system, though rumours abound that Asian banks have yet to own up to their share of the expected $400 billion to $500 billion losses from the US mortgage debacle. 
Stock markets were battered across the region. The Hang Seng index in Hong Kong fell 4.15 percent, while Tokyo's Nikkei slumped to the lowest level in a year and a half, dragged down by the shares of the "Seven Samurai" exporters. 
Asian jitters set off fresh turmoil on Europe's credit markets. The iTraxx index measuring default insurance on bank and insurance bonds hit an all-time high of 63.5. 
"The whole financial market is in turmoil with Bund-Swap-Spreads going through the roof," said Andrew Guy, director of ADG Capital Management. 
Marcus Schuler, director of credit marketing at Deutsche Bank, said spreads on low-grade European bonds had been jumping 10 basis points a day for the last week. "There's been risk aversion across the board," he said. 
In a rare move, the European Covered Bond Council said it was suspending trading of mortgage-linked bonds in the inter-bank-market owing to the "undue over-acceleration in the widening of spreads." 
Abbey National today cancelled its sale of covered bonds, the third company to withdraw an issue this week. 
Charles Dumas, chief strategist for Lombard Street Research, said credit woes had led to an alarming spike in the "Ted spread" between commercial Libor and US Treasury bills, now near 150 basis points. "Libor is at a premium to T-bills not matched since the great crash in 1987," he said. 
Mr Redcker said the flight from risk has led to a sudden unwinding of the $1,200 billion yen "carry trade" as hedge funds and Japanese investors close risky positions. The yen has snapped back violently from yen118 to yen108 against the dollar since early October, with similar moves against other Anglo-Saxon currencies. 
"We're seeing a liquidation of the carry trade. For years it created liquidity for global equities in an upward spiral, but this has now turned into a downward spiral. Base metal prices are falling, which that tells us that Asia may not be as strong as we thought," he said. 
Copper prices fell 6.4 percent in Shanghai today. It follows data showing China's copper imports fell 4.4 percent in October, a sign that central bank moves to choke off credit are starting to slow runaway investment in heavy industry and construction. 
Jerry Lou, China analyst for Morgan Stanley, said the Shanghai bourse -- already down 15 percent -- was now the word's "biggest valuation bubble." 
"Lessons from Japan in the late 1980s show that once the stock market starts to head down, earnings and multiple contraction can together crush the market like a market rolling downhill," he said. 
* * * 
 
European banks suspend trading in mortgage bonds 
By Esteban Duarte and Steve Rothwell Bloomberg News Service Wednesday, November 21, 2007 
http://www.bloomberg.com/apps/news?pid=20601102&sid=aTCTOhu0Jxk8 
European banks agreed to suspend trading in the $2.8 trillion market for mortgage debt known as covered bonds to halt a slump that has closed the region's main source of financing for home lenders. 
The European Covered Bond Council, an industry group that represents securities firms and borrowers, recommended that banks withdraw from trades for the first time in its three-year history until Nov. 26. Banks are still obliged to provide prices to investors, according to the statement today. 
Banks, including Barclays Capital, HSBC Holdings Plc, and UniCredit SpA, took the step as investors shun bank debt on concern lenders face more mortgage-related losses than the $50 billion disclosed. Abbey National Plc, the U.K. lender owned by Banco Santander SA, became the third financial company to cancel a sale of covered bonds in a week as investors demanded that banks pay the highest interest premiums on covered bonds in five years. 
"We are in a deteriorating situation," Patrick Amat, chairman of the Brussels-based ECBC and chief financial officer of mortgage lender Credit Immobilier de France, said in a telephone interview. "A single sale can be like a hot potato. If repeated, this can lead to an unacceptable spread widening and you end up with an absurd situation." 
...Sales Pulled 
Covered bonds are securities backed by mortgages or loans to public-sector institutions. The notes offer more protection to bondholders than asset-backed debt because the issuing bank is liable for repayments. They typically have the highest credit ratings. 
"There's a crisis of confidence for everything but AAA government bonds," Arnd Stricker, a management board member at Corealcredit AG, the German commercial property lender owned by Lone Star Funds, said at a conference in Frankfurt. "Covered bonds are being thrown in the same basket" as mortgage securities, even though they are safer, he said. 
Abbey National in London said today it postponed its sale of covered bonds because of "poor" demand. AIB Mortgage Bank, a unit of Dublin-based Allied Irish Banks Plc, pulled a covered bond sale in euros yesterday and Ahorro y Titulizacion, an investment unit controlled by Spanish savings banks, decided against issuing the debt on Nov. 16. 
Northern Rock Plc, which suffered the first run on a U.K. bank in more than a century, may have the top credit ratings on its covered bonds cut by Moody's Investors Service, the ratings firm said yesterday. 
...Spreads Widen 
"In light of the current market situation and in order to avoid undue over-acceleration in the widening of spreads," the committee of banks and borrowers "recommends that inter-bank market making be suspended," the council said in an e-mailed press statement. 
The extra yield, or spread, that investors demand to hold covered bonds sold by German banks instead of government debt has climbed to 38 basis points from 23 basis points six weeks ago, according to Merrill Lynch & Co. indexes. The premium is the widest in more than five years. 
Some banks agreed to stop providing prices on covered bonds for half a day on Aug. 16 to stem losses from widening spreads, according to Johannes Rudolph, a covered bond analyst at HSBC in Dusseldorf. Today's suspension is the first from the industry association, ECBC's Amat said. 
"Conditions have really weakened over recent days," said Andreas Denger, a covered bond analyst at Calyon SA in London. "Most investors are not willing to invest in the current volatile market." 
...Pfandbrief 'Solidarity' 
Trading in Germany's pfandbrief market was also suspended in a sign of "solidarity," said Helga Bender, a spokeswoman for the German Pfandbrief Association VDP's German Market Maker and Issuer Committee. Pfandbrief bonds are a subset of covered bonds with stricter regulations. 
The European covered bond market grew in out of the pfandbrief market. The first covered bond was issued in 1769 when King Frederick the Great of Prussia needed to rebuild the country after the Seven Years War against Austria and Saxony. Spain, Ireland, Sweden, Denmark, Norway, Finland, France, Portugal, and Italy have new created laws to expand the market, according to Standard & Poor's. 
The ECBC started in September an "8-to-8 committee" of eight banks that arrange covered bond sales and eight representatives for issuers of the debt to set recommendations in deteriorating markets. 
"Without market making between banks, investors will shun the sales of new covered bonds," said Santiago Rubio, who oversees 14 billion euros ($21 billion) of assets as head of fixed income at La Caixa's asset management arm in Madrid. 
* * * 
Credit derivatives market grows by nearly half in six months 
By Kabir Chibber Bloomberg News Service Thursday, November 22, 2007 
http://www.bloomberg.com/apps/news?pid=20601087&sid=a58EF32GpHeg&refe... 
The market for derivatives grew at the fastest pace in at least nine years to $516 trillion in the first half of 2007, the Bank for International Settlements said. 
Credit-default swaps, contracts designed to protect investors against default and used to speculate on credit quality, led the increase, expanding 49 percent to cover a notional $43 trillion of debt in the six months ended June 30, the BIS said in a report published late yesterday. 
Derivatives of debt, currencies, commodities, stocks and interest rates rose 25 percent from the previous six months, the biggest jump since the Basel, Switzerland-based bank began compiling the data. Investors have been turning to credit derivatives as a way to speculate on a growing risk of defaults amid record U.S. mortgage foreclosures. 
"The pace of increase in the credit segment outstripped the rises in other risk categories," Christian Upper, a BIS analyst in Basel, wrote in the report. Credit-default swaps are "the dominant instrument," accounting for 88 percent of credit derivatives, the BIS said. 
The money at risk through credit-default swaps increased 145 percent from last year to $721 billion, the report said. The amount at stake in the entire derivatives market is $11.1 trillion, according to the BIS, which was formed in 1930 to monitor financial markets and regulate banks. 
Derivatives are financial instruments derived from stocks, bonds, loans, currencies, and commodities or linked to specific events like changes in interest rates or the weather. The report is based on contracts traded outside of exchanges in over-the- counter market. 
Increased trading pushed ICAP Plc to a record this week as the world's largest broker of transactions between banks reported a 34 percent increase in net income to 80.1 million pounds ($164.4 million). The London-based company, which profits when prices fluctuate, handled a record amount of transactions as financial institutions bet on or hedged against losses linked to home loans. 
The Markit CDX North American Index of credit-default swaps on 125 investment-grade rated companies has almost tripled since February to 90 basis points from 33. 
Buyers of credit-default swaps receive the face value of underlying debt in the event of nonpayment, in return for the defaulted securities or cash equivalent. A basis point increase in the cost of a contract covering $10 million of debt is equivalent to $1,000 a year. 
Interest-rate derivatives remained the largest part of the market, gaining 19 percent to $347 trillion outstanding by June, the report said. Single currency interest-rate swaps made up 79 percent of the market. 
Foreign exchange derivatives grew by 21 percent to $49 trillion as the dollar declined 2.5 percent against the euro in the first half. Contracts on the Swiss franc increased 32 percent, trailed by 27 percent increases in both the U.K. pound and the Canadian dollar contracts, the BIS said. 
Equity market derivatives grew by 23 percent in the first half to $9 trillion. Growth was highest in Latin America equity derivatives at 43 percent and lowest in Japan at 6 percent. Japan's Nikkei 225 index rose 4.8 percent during the period while the MSCI Latin America index increased 25 percent. 
* * * 
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