Paris:
The global debt markets are in the midst of a jarring
repricing of risk. Uncertainty abounds, but an article
recently published by Standard & Poor''s Ratings Services
says that the financial sector as a whole has sufficient
fundamental strength to absorb the significant bank loan
and securities markdowns, reduced earnings in investment
banking and trading, and increased credit losses that
are sure to come in the second half of 2007.
The
article, which is titled Strong Fundamentals And Central
Banks Should See Financial Institutions Through Rough
Markets, says that although Standard & Poor''s had
expected a correction, the complexity of financing structures
and risk-transfer strategies in the financial sector are
prolonging the repricing process and causing risks to
propagate in unexpected ways this time around.
Short-term
liquidity has tightened, not only in asset-backed commercial
paper (ABCP) but also in every area of the money markets
except Treasury bills. This has forced central banks to
take actions to bolster market confidence.
"During
this correction, credit market participants are questioning
the financing structures as much as the underlying credit
risk of borrowers, which remains generally good by historical
standards," noted Standard & Poor''s credit analyst
Scott Bugie.
Nervous
investors are requiring additional risk premiums for most
structured instruments-or are avoiding structured investments
altogether-even though realized losses in highly rated
structured securities have been insignificant so far this
year.
Tight
liquidity is forcing the prices of private-label U.S.
residential mortgage-backed securities (RMBS), particularly
subprime RMBS, down to unanticipated levels, throwing
security valuations into disarray.
"Painful
though it will be, the correction ultimately should be
healthy for the financial sector, leading to more differentiated
pricing of credit and less-aggressive practices in mortgage
lending and the leveraged loan market," Bugie added.
The
adjustment process will be especially difficult for specialized
mortgage lenders, investors with high concentrations in
the affected categories of RMBS, holders of hung leveraged
loans (those forced onto the balance sheets of underwriters
because they couldn''t clear the market), and institutions
that rely on short-term wholesale funding, particularly
through structured vehicles. Indeed, the correction already
has dented the credit standing of several financial firms
in the US and Europe.
The
fundamental strength of the global financial sector remains
sound, and the sector has good medium-term growth prospects.
Consequently, financial groups that have the necessary
strength and financial resources will continue to look
for acquisition opportunities, particularly at the more
distressed prices to be found during this turbulent correction
in the credit markets.
also see : General
reports on Banks & Financial Institutions Other
reports by S&P
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