Corporate debt and bond market fragility

Michael Keaney Michael.Keaney at mbs.fi
Mon Sep 17 09:05:52 MDT 2001


Henry

What's your take on the bond market situation? I've forwarded to PEN-L
Peter Martin's FT article of 11 September highlighting how much riskier
it is thanks to the recent emphasis on "shareholder value" and companies
having to make their balance sheets "work harder". (See
http://csf.colorado.edu/pen-l/2001III/msg02799.html). Without sufficient
assets to back up their securities, companies are going to find it hard
to service their debts in the impending lean times. Martin tries his
best to be upbeat about it, but even he is forced to admit:

Bond risks are only some of the recent changes in the financial system
of the developed economies. Managers are lavishly incentivised to push
up the return on equity. Bond investors are assuming equity-like risks.
Venture capital and private equity firms are pushing for much more rapid
payback. Lending decisions are increasingly divorced from the long-term
assumption of credit risk.

For 10 years, the markets' attention was focused on the way that these
changes helped push equity prices steadily upwards. But now that
equities' irresistible rise is over, investors are starting to wake up
to the structural changes that accompanied the bull market in stocks:
increasing fragility and twitchiness elsewhere in the financial system.

<end quote>

All this would appear to undermine further the recovery Greenspan is
desperate to foment. And Martin was writing this prior to last Tuesday's
events.

Michael Keaney

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