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Credit crunch to sting into next year



By Nigel Davies
18 July 2008 @ 08:17 am BST


Henry Paulson
Secretary of the U.S. Treasury Henry Paulson announces that the Treasury Department and Federal Reserve will lend money and buy stocks if necessary to aid embattled mortgage lenders Fannie Mae and Freddie Mac during a statement to the media at the Treasury Building in Washington, July 13, 2008. A near one year-old credit crunch still has plenty of venom and will sting global financial markets and the economy well into next year or even into 2010,...
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HIGHER RISK PREMIA HERE TO STAY

The poll found that credit markets are not likely to return to conditions seen before the crisis erupted any time soon. Some argue that where they are now is more normal given that before the credit crunch began they were too low.

Three-month Euribor interbank lending rates saw their widest premium to the base rate of around 90 basis points last December compared with around five basis points before the credit crisis. It has since only eased slightly to around 65 basis points.

In the poll, 33 economists said the spread between three-month money rates and base rates will not "normalise" until six to 12 months have passed. But thirty-seven said one to two years or even longer would be more likely.

Indeed, many economists argue that borrowers will have to get used to paying a higher risk premium to access capital, while institutions doing the lending inevitably adapt stricter risk practices.

"We are unlikely to return to the very tight levels seen at times during this period but as the crisis eases over the next year, spreads should narrow somewhat," said John Ryding, formerly of Bear Stearns and now economist at RDQ Economics.

AGGRESSIVE LENDING

The survey showed analysts were split about whether the credit crunch marked the definitive end to a roughly two-decade era of declining interest rates. Thirty-nine said it had, 45 said the opposite.

Indeed, while banks have scrambled to protect themselves by tightening lending standards, many analysts say the main reason for the jump in world borrowing costs stems from soaring food and energy costs pushing up inflation.

"The era of declining interest rates has certainly come to an end - but this is more due to resurging global inflation risks than to the credit crunch," said Thomas Hempell at Generali Investments in Frankfurt.

Copyright 2009 Thomson Reuters. All rights reserved.

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