credit update 12 09 07

Credit ratings agencies were convened in Washington to explain how they rate structured financial products based on mortgage assets.

The uncertainty of rolling over more than $100 billion of commercial paper debt hangs over the money markets like Damocles’ sword, more acutely in the markets for asset-backed commercial paper ABCP. The notion that some of these ABCP were unsound sent investors to demand their money back and to refuse to keep rolling over the loans.

Another undercurrent of the subprime ructions is the burgeoning $907.4 bn credit card debt. The turmoil in the housing market has blunted home equity loans, forcing already debt-laden consumers to turn to credit card for financing. With the hefty interest rates on credit cards, up to 13.46%, those with poorer credit who are struggling to pay mortgages could default. Earlier, Moody's reported that American credit card companies' bad debts jumped 30% year-on-year. Observers worry that these credit card debts have been repackaged and sold off to the capital markets much like the subprime mortgages were. markets edged up yesterday with the Nikkei up 0.71%, All Ords up 0.63%, Straits Times up 1.53%. Hong Kong and Chinese shares paced decline as inflation surged and trade surplus widened, fuelling fears that borrowing costs will rise as the central bank tightens liquidity. Meanwhile, Japanese shares surged as machinery orders in July surged at three times the pace forecasted by economists. Australia's lowest unemployment rate plus the central bank's keeping the interest rate unchanged boosted the equities market.

US Treasury Secretary Paulson warned that crisis of confidence in the credit market is likely to last longer than previous financial shocks of the past two decades due to the complexity and the distribution of the securities. He adds that the next two years would be uncertain as many of the subprime loans reset to higher rates. He reiterates his resistance to proposals that would allow Fannie Mae and Freddie Mac, the giant government-chartered mortgage financing companies, to buy and hold billions of dollars in additional mortgages in their own investment portfolios.

Meanwhile, ECB President Trichet, called for authorities to scrutinize unregulated entities, whose activities he believes to have a major contribution to the subprime fallout. He also said that said there is still the risk of inflation accelarating and central banks may have to raise interest rates once the financial market turbulence abates. Earlier, the ECB postponed rate increase due to market volatility.

Asian credit benchmarks remained stable, with a slight widening of the iTraxx Asia ex Japan by 1.65 bps.

Confident that the Fed will cut rates soon, US stocks rallied with the S&P 500 up 1.36% and the Dow Jones Industrial up 1.38% led by technology and energy shares.