大象传媒

Crunch time?

• Robert Peston
• 29 Jun 07, 10:29 AM

The global rise in interest rates is beginning to bite - though not in a wholly predictable or reassuring way.

Whatever the official surveys show, retailing bosses tell me that they have detected quite a pronounced slowdown in trade over the past couple of weeks - manifested in softness in that bellwether, the Marks and Spencer share price.

And adjusting for the propensity of most store bosses to confuse a common cold with bubonic plague, the climate on the high street is likely to be less clement for a while.

More serious, however, is what's happening in credit markets and to hedge funds. All sorts of complicated bonds and financial instruments have seen sharp falls in their price - leading to humungous losses for hedge funds and investors exposed to those hedge funds.

It's a delayed reaction to problems in the US housing market, notably the losses experienced by providers of sub-prime loans, or lenders to lower quality borrowers.

But here's the worry: contagion to all sorts of other loans.

We live in a complicated world where debt is sliced, diced and repackaged in ways that in theory are supposed to provide investors such as hedge funds and investment banks with "pure" solutions for their requirements for specific kinds or risk and return.

In theory this represents a great spreading of the risks of lending to lots of different institutions - which should mean that when things go wrong, a little bit of pain is felt by many firms, rather any single institution going bust.

That's the theory. In practice, all this financial innovation has generated unprecedented speculative activity - so much of the trading in these new financial instruments is basically a bet or punt, whose effect is actually to magnify the financial impact of a market event, like a crunch in the US sub-prime market.

And worse than that, the market in many of these financial products - with confusing names like Collateralised Debt Obligations and Collateralised Loan Obligations - is highly illiquid. So when everyone wants out, the price falls through the floor.

What's more, all credit markets are connected. So when big losses occur in one area, the supply of credit to seemingly unconnected borrowers can be cut very rapidly - as we are seeing in a spate of cancellations of higher risk debt-issues by companies and financial businesses.

To be clear, this is not meltdown, or at least not yet. But there is no sign of credit markets being bailed out by central banks. Quite the opposite, in fact.

Both the and the are signalling that they are still worried about inflationary pressures - which means that interest rates are likely to rise further still.

We may be in for a hair-raising few weeks and months.

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