Bank: Worst of Global Crisis Yet to Come as Rescue Cash Runs Out
Wednesday, 18 Apr 2012 12:13 PM
The worst may be yet to come in the global financial crisis as the
central bank spending that kept defaults low runs out, according to Deutsche
Bank AG.
Credit-default swap prices imply that four or more European nations may
suffer so-called credit events such as having to restructure their debt,
strategists led by Jim Reid and Nick Burns said in a note. The Markit iTraxx
SovX Western Europe Index of contracts on 15 governments including Spain and
Italy jumped 26 percent in the past month as the region’s crisis flared up.
“If these implied defaults come vaguely close to being realized then the
next five years of corporate and financial defaults could easily be worse than
the last five relatively calm years,” the analysts in London said.
“Much may eventually depend on how much money-printing can be tolerated
as we are very close to being maxed out fiscally.”
Default rates stayed in line with historical norms between 2007 and 2011
because of the “unprecedented intervention” of European and U.S. policy makers,
the analysts wrote in the report.
Now, credit markets are giving up the gains that followed the European Central Bank’s 1 trillion-euro ($1.3 trillion) longer-term refinancing operations and the U.S.’s Operation Twist that buoyed government bonds.
Now, credit markets are giving up the gains that followed the European Central Bank’s 1 trillion-euro ($1.3 trillion) longer-term refinancing operations and the U.S.’s Operation Twist that buoyed government bonds.
Although defaults have been low, recoveries are falling because the
public spending that kept non-payments down has failed to spur economic growth,
according to the analysts.
Credit-default swaps pay the buyer face value in exchange for the
underlying securities or the cash equivalent
should a borrower fail to adhere to its debt agreements.
“The LTROs gave us some respite but they don’t appear to have taken the
problem away,” Burns said in a phone interview.
“At the moment there are no more LTROs on the table.”
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