credit update 13 09 07

The Asian stock markets ended mixed yesterday with the Nikkei down 0.50%, Hang Seng up 1.49%, All Ords down 0.20% and Straits Times up 0.33%.

The New Zealand central bank left the interest rate unchanged at the high 8.25% amidst growing inflationary pressures and with the impact of the global financial turbulence still unclear. It expects the economy to grow over the next two years, beefed up by rising prices for dairy products and other commodities, but caveats that the global financial market convulsions could adversely affect the economic outlook for its trading partners such as the US.

In an effort to increase corporate debt trading, China is set to relax its control on investment by insurers and allow them to buy unsecured corporate debt. It will also let banks trade corporate bonds of publicly traded companies on both the interbank market and the securities exchange.

The dollar weakened to near its all-time low $1.3914 versus the euro on signs the U.S. economic growth is slowing. Analysts expect the dollar to continue falling as they wait for a rate cut by the Fed.

US Treasury Secretary Henry Paulson called on lenders to expand the range of mortgage products to refinance loans made unaffordable by resets. Adding a human face to the subprime crisis, Paulson underscored that "we're focused on homeowners where it's their primary residence, finding ways to keep them in their home." He urged mortgage financing companies to identify and offer refinancing and other assistance to troubled borrowers facing big rate resets.

There is divergence among central banks on the prescription to the current crisis. While the ECB and the Fed have recently been quick on the draw to inject liquidity in the markets, the Bank of England, although conceding that pumping cash will prop the system in the short-run, warned that such an approach would "encourage excessive risk-taking and will sow the seed for a future financial crisis."

Moody's predicts that defaults among speculative grade corporate issuers will rise over the next two years due to increased funding costs and difficulty in accessing debt capital. Issuer-weighted global speculative grade default rate is projected to reach 4.1% a year from now, and 5.1% by Aug 2009. Hardest hit will be the US market.

Except for Australia, the Asian credit benchmarks chalked modest improvements with the iTraxx Asia ex Japan 1.25bp tighter.