Scale of shutdown in debt markets revealed

10 December 2007

The full scale of the shutdown in debt markets around the world has been laid bare by figures showing that growth in corporate bond markets almost ground to a standstill in the late summer. The Bank for International Settlements reveals today that companies in the UK have cut back on their borrowing at the fastest rate in over three years. In Germany, Europe's biggest economy and the world's biggest exporter, businesses paid back more than they borrowed for the first time since the 1980s.

 

The figures, published in the BIS's quarterly survey of financial markets, come amid growing speculation that Bank of England deputy governor Sir John Gieve may be asked to resign for his part in the Northern Rock fiasco. The Bank has maintained that the health of London's money markets has not been considerably worse than in other currencies, defending its comparatively stern stance on pumping extra cash into the system.

 

However, the BIS - an international group of central bankers - said that, in fact, the UK "saw some of the sharpest increases in this period, as illiquidity problems at the lender Northern Rock became more and more evident". The BIS said that although the crunch started in the money markets, where banks lend to each other, it is now preventing companies from borrowing and investing as heavily as they have done in recent years.

 

It said the value of bonds issued by businesses in the international debt markets halved between the second and third quarters of the year. The $396bn (£195bn) issued was 4pc lower than the same period last year - the first fall in two years - as banks led the charge of businesses out of the credit markets.

 

In Germany, whose banks have been some of the biggest victims of the sub-prime mortgage crisis in the US, some $20bn more was paid back than borrowed. The flight from borrowing was even more dramatic in emerging economies.

 

The BIS said it would not be clear until well into next year how much money banks and investors stand to lose as families in the US housing market default on their mortgages. It said one of the most important developments during the crisis had been the role hedge funds are now playing in supplying extra cash to the market.

 

© Graham Bishop