UK : Egg/Citigroup Clamps Down On Riskier Credit Card Customers

Probably no coincidence that Citigroup is forced to make the move first and one of the largest US pawnbroker & payday lender is entering the market at the same time..... Once again their risk modeling wasn´t quite perferct...... How can you buy a UK credit card company close to a top in the UK housing market...... But i think it is very safe to say that others will have to follow ( not only in the UK ) Citi in this kind of tightening.....I suggest to read this Total UK personal debt statistic February 2008 from Credit Action to understand the magnitude of the mess especially in UK .

Sicher kein Zufall das ausgerechnet Citigroup den ersten Schritt machen muß und gleichzeitig das größte US Pfandleihaus & einer der größen "Kredithaie" in den UK Markt eintritt..... Es sieht so aus als wenn die mal wieder genau zum Top eine riskante Investition getätigt hätten.... In diesem Fall bin ich mir sicher das Citi mit diesem Schritt nicht lange alleine bleiben wird. Andere Anbieter ( auch länderübergreifend ) werden sich dieser Art der Kreditverknappung anschließen müssen.... Um einen Überblick über das Ausmaß gerade in UK zu bekommen empfehle ich einen Blick auf diese Übersicht Total UK personal debt statistic February 2008 von Credit Action zu werfen.

This quote sume it up / Dieses Zitat spricht Bände

"We can certainly understand the concerns, but even if people are up-to-date with repayments, they are people we decided we no longer wish to lend money to regardless of their status." Egg spokesman

Egg customer anger at credit move BBC
Angry customers of internet bank Egg have hit out at its decision to cancel their credit cards.

Egg says 161,000 cards belonging to people whose credit profiles have deteriorated since they signed up will stop working in 35 days' time.

But people who insist they have good records have been contacting the BBC to say they are on the list.

A spokesman for the bank said those affected were customers it no longer wanted to lend to "regardless of their current status".

Credit cards are being withdrawn from 7% of Egg's customers who it deems to pose an unacceptably "high risk".

This could include those who have missed repayments or exceeded their credit limit.

'Arbitrary action'
Cardholders will be able to continue making minimum monthly repayments on their balances but will not be able to spend any more after the deadline.

The move follows a "one-off" review after Egg was bought by US-based Citigroup for £575m last year.

The bank is not demanding immediate repayment of balances or making any changes to customers' terms and conditions or their interest rates. ....

Gillian Cox, of Farnham, Surrey, said she was "absolutely furious" to learn her credit card had been cancelled in what she described as an "unbelievable arbitrary action".

Mrs Cox said she and her husband are "retired, no mortgage, no debts" and "always paid the balance off in full each month".

She added that she had contacted credit reference agency Experian who said she was marked as having an excellent credit rating, "thus totally negating Egg's claim that this measure is about credit risk".

'Stop spending'
A spokesman for Egg said: "We are sorry some customers are upset after receiving notification we are ending their credit card arrangement, but they are people we do not feel it is appropriate to lend any money to."

He added: "The decision was taken after an extensive one-off review of our credit card book following acquisition by Citigroup."

Der Spiegel London - Die Internetbank Egg greift durch. Die britische Citigroup -Tochter will rund sieben Prozent ihrer zwei Millionen Kunden die Kreditkarte sperren. Offenbar haben es Egg und Mutterkonzern Citi mit der Angst zu tun bekommen - sie fürchten, die Risikokunden könnten sich übernehmen und ihre Darlehen nicht zurückzahlen können. Offiziell heißt es: Das Kreditrisiko der "riskanten" Kunden sei zu hoch.

Egg teilte zwar mit, der Schritt habe nichts mit der weltweiten Kreditkrise zu tun. Es handele sich bloß um eine "Neubewertung der Risiken", nachdem Egg im vergangenen Jahr von der Citigroup gekauft worden war. Die Maßnahme zeigt aber, dass Banken weltweit konservativer bei der Darlehensvergabe werden und hart gegen Risikokunden durchgreifen.

Die Egg-Mutter Citi hatte sich bei riskanten Kreditgeschäften so sehr verhoben, dass an den Finanzmärkten sogar zeitweise Insolvenzgerüchte zirkulierten. Citi hat im Zuge der Kreditkrise mehr als 18 Milliarden Dollar abschreiben müssen und damit einen Verlust im vierten Quartal von rund zehn Milliarden Dollar verbucht. Mit der Wahrheit über das Ausmaß der Krise rückte Citi nur scheibchenweise heraus. Egg will die Karten innerhalb von 35 Tagen sperren, die Kunden wurden bereits angeschrieben.

The Rise of Pawn Shops and Fringe Banking

This is probably one of the very few sectors in the US financial system with a very bright future.....Hat tip to Minyanville for digging this from the FT

Das Geschäft der Pfandleihhäuser dürfte eines der wenigen Sektoren im US Finanzsystem mit glänzenden Zukunftsperspektiven sein.... Dank geht an Minyanville für das ausgraben dieser Geschichte der FT.

US pawnbrokers benefit from hard times FT
Hard times in the US are benefiting pawnbrokers as beleaguered consumers pledge jewels, electronics and other goods in return for loans with interest rates running as high as 300 per cent a year.

Dave Adelman, president of the National Pawnbrokers Association, said the number of loans at US pawn shops had risen 15-20 per cent since October. He attributed the increase to rising fuel prices and deteriorating economic conditions – an assessment echoed by other industry executives.

“Brief and shallow downturns in the economy may benefit our business model,” said Daniel Feehan, chief executive of Cash America, the biggest US pawnbroker chain, with 942 locations. ( Cash America Presentation )

> Probably no coincident that they have entered the UK market in mid 2007....

> Sicher kein Zufall das die Mitte 2007 in den UK Markt eingetreten sind......

Pawnbrokers offer loans in return for personal items. Customers can buy back their property for the value of the loan plus a fee, which works out to an interest rate that can reach 300 per cent on an annualised basis, according to the NPA. If borrowers do not pay off the loan in a given time, the unredeemed item can be sold.

> Here comes the definition from "Cash Advance " & "Pawn" via Cash America

> Hier die Definition der Begriffe vie Cash America

Cash America said on Thursday its profits had risen 21 per cent to $26.3m in the fourth quarter, reflecting higher sales of pawned goods and more loans.

Alan Fishbein of the Consumer Federation of America said pawnbrokers and other “fringe” banking operations – such as those making loans against future pay cheques or car titles – had grown as banks had withdrawn from poorer areas. About $48bn in payday loans are made every year and the revenues in the whole fringe banking industry are an estimated $12bn-$15bn, according to Dennis Telzrow, a consumer finance analyst at Stephens, an investment bank.

An estimated 10m US households are thought to be outside the banking system, according to the Federal Deposit Insurance Corporation. The NPA estimates there are 12,000 to 14,000 pawnbroker shops in the US.

On Manhattan’s 47th Street, the New York block through which about 90 per cent of US diamonds are sourced, some merchants report a sharp uptick in the amount of jewellery being brought in for sale.

“Its real sad – they don’t want to sell,” said Ruben, a 52-year-old street hawker who buys jewellery from passers-by in the diamond district.

“They might have paid $150,000 for a necklace but they will get back $25,000 or $30,000 at most. But it’s either that or lose their house.”

60 Minutes Legitimizes Walking Away

I have borrowed the headline 60 Minutes Legitimizes Walking Away from Mish. He has also some more thoughts on this topic ( read also The Business of Walking Away ) . Also a hat tip to my friends from Housing Doom for digging the Youtube version. I hope this clip shows especially the European visitors how bleak the reality looks like and why we are still in the beginning of this painful process of the "correction". Lots of Germans ( including Landesbanker like West LB , Sachsen LB, IKB etc.) can´t understand that it is possible to just "walk away" from the house without facing consequences for the rest of their lifetime like here in Germany.

Dank geht an Mish für die "geborgte" Überschrift die eine ganz neue Dynamik in den "Anpassungsprozeß" der US Immobilienkrise bringen wird . Hier weitere Gedanken von Mish The Business of Walking Away . Zudem dank an Housing Doom für das aufstöbern der Youtube Version.

Nur zur Erläuterung muß erklärt werden das anders als in Deutschland die Haftungen in großen Teilen der USA und insbesondere in den Hochburgen wie Kalifornien bei einer Zwangsvollstreckung komplett anders als zum Beispiel in Deutschland gestaltet sind. Dort wird nur mit der Immobilie gehaftet. Das ist gleichbedeutend damit das selbst wenn die Immobile unter den Hammer kommt und die Bank wie momentan üblich gigantische Verluste macht der Schuldner nicht für diesen Verlust einzustehen hat.

Praktisch, oder?

Würde mal tippen, das auch dieses Neuland für die Manager der Landesbanken ist ( siehe Sachsen LB, West LB , IKB usw ) Sinnvollerweise haben die Verantwortlichen oftmals gleich die ganze Bank aufs Spiel gesetzt um auch ja genug US Hypothekenpapiere zu erwerben.....

So kommt es vor das zum Beispiel wenn ein Haus auf der gegenüberliegenden Straßenseite für 300.000 $ zum Verkauf steht und man für sein eigenes Objekt mit 400.000 $ in der Kreide steht ( Eigenkapital war ja zum Glück dank der wahnwitzigen Finanzierungen in den letzten Jahren aus der Mode gekommen ) es nur logisch ist das neue Objekt zu erwerben und das andere in die Zwangsvollstreckung gehen zu lassen. Der damit ruinierte Creditscore sollte bei dieser Ersparniss nicht weiter ins Gewicht fallen. Noch besser wird es wenn man es sogar geschafft hat während Zeiten steigender Immopreise die Refinanzierungskeule zu schwingen und siene Immobilien mit immer neuen Hypotheken zu belasten. Welch gigantische Ausmaße das ganze in der Verganheit angenommen hat zeigt eindrucksvoll dieser Chart.

Schweizer Ansichten von meinen geschätzen Bloggerkollegen gibt es auf Zeitenwende

Maxed Out

Have a nice weekend

Allen ein schönes Wochenende

How Credit Got So Easy And Why It's Tightening

The WSJ has put up a good slide show that explains a part of the current debacle.

For a longer more detailed textversion click on the headline

Das WSJ hat ne recht gute Slide Show zusammengestellt die einen Teil der aktuellen Misere übersichtlich erklärt.

Für eine ausführlichere Version bitte auf die Überschrift klicken.

Hat tip to WMBZ!

Strong economic optimism (... is a contrary indicator) / Hussman

Glad to hear that his fund just hits a new ATH. I especially like the comment from the past that Milken has said via James Grant. This sums it all up..... Click on the headline to read the entire report.

Freut mich besonders das sein Fonds gerade jetzt auf einem Allzeithoch steht. Der Kommentar von Milken aus dem Jahr 1989 via James Grant ist kaum zu toppen. Dieser Satz beschreibt treffend was am Markt momentan los ist und was in den letzten Jahren abgegangen ist....Klickt bitte auf die Überschrift um den kompletten Bericht zu lesen.

The way to wealth in a bull market is debt. The way to oblivion in a bear market is also debt, and nobody rings a bell. Easy access to credit facilitates the marginal transaction. It enlarges the gross national product, expands the debt industry, and creates the rationale for a future relaxation of lending standards. It hefts up prosperity by its bootstraps and makes it something more than it would otherwise be. It produces stupendous fees and underwriting commissions for investment bankers. Good ideas become bad ideas through a competitive process of “Can you top this?” But when the cycle turns, the process must swing into reverse. Marginal transactions, financed by debt, must be unwound through foreclosure or bankruptcy. Asset values, propped up by debt, must fall, and thereby reduce other asset values in a chain reaction.”

- James Grant (“Michael Milken, Wikipedia Meet Sewell Avery” 1989)

Strong economic optimism (... is a contrary indicator)
Despite credit concerns, Wall Street remains exuberant about economic prospects. Last week brought a 6-year high in consumer confidence, evidently supporting the idea that the consumer remains strong and the economic expansion remains intact.

Unfortunately, if you examine the data, you'll quickly discover that consumer confidence is a lagging indicator, well explained by past movements in GDP, employment, and capacity utilization. Worse, for the stock market, it's a contrary indicator (especially when it is well above the "future expectations" component of the same survey). This is a fact that we've had the good fortune of exploiting over time, not only in early 2000 when new highs in consumer confidence supported a defensive position, but conversely in the early 1990's, when new lows in consumer confidence supported a leveraged position in stocks (prompting that “lonely raging bull” comment in the L.A. Times).

It is no less true that high levels of economic optimism are regularly observed at the peaks of foreign economic expansions. That shouldn't be suprising. It's the very nature of a peak that it can't be produced except by unusual optimism.

The uncertainty in the economic outlook is not only that the U.S. economy appears increasingly vulnerable, but also that tensions with China are markedly increasing. Last week, the House Banking Committee - frustrated with a record current account deficit and the depressed value of the Chinese yuan - passed a measure that would provide for countervailing duties on goods from countries that manipulate their currencies. The Senate Finance Committee passed a separate measure. The increasing concerns over the toxicity of imported consumer products - tootpaste, children's toys, fish, tires, pet food - are almost certain to lower the political barriers to more stringent trade legislation as well.

Maybe it's just anectodal, but I've increasingly heard the media using the phrase "Communist China" in recent weeks, rather than simply "China." Unfortunately, as a result of accumulated deficits from military spending and irresponsible U.S. fiscal policy, China owns a substantial portion of the float in U.S. Treasury securities. Indeed, nearly all of the growth in U.S. gross domestic investment since 1998 has been financed with foreign capital inflows. Combining these ingredients is a lot like watching a small child play with a chemistry set - you don't know exactly what's going to happen, but you can almost count on a trip to the emergency room.
Another useful contrary indicator is the mutual fund cash/assets ratio, which just hit a fresh low of 3.5%. Since cash levels tend to fluctuate with Treasury bill yields, Norm Fosback of the Institute for Econometric Research noted that the relationship to subsequent market returns is significantly improved by factoring out the effect of interest rates, which I've done in the chart below. Adjusted for interest rates, mutual fund cash levels are the lowest level, relative to assets, on record. This is another sign of extreme bullishness about the prospects for the stock market and the economy. Unfortunately, such extreme bullishness has historically been well correlated with subsequent weakness.

Still, I continue to believe that it's too early to form any strong expectation of an oncoming recession. The evidence is certainly increasing, given that credit spreads have now blown wider, and the growth rate of employment is edging closer to the levels that typically indicate imminent recession risk (1% year-over-year or 0.5% over a 6-month period). The ISM Purchasing Managers Index also shifted lower, though still above the 50 level. While readings below 50 on the PMI are not sufficient indicators of recession risk in themselves, their usefulness is substantially magnified when they occur in the context of slow employment growth, a flat yield curve, rising credit spreads and flat or declining stock prices.

Couple Learn the High Price of Easy Credit / NYT

debt everywhere..... this example illustrates what many families are experiencing. and with a recession under way..........

schulden so weit das auge...ich denke diese familie steht stellvertretend für viele in den usa. und das alles im auge einer kommenden rezession.......

this sums it up :-)

Snl_dontbuystuff
Hochgeladen von shosterman

here another debt statistic / hier noch ne schuldenstatistik

In 1980 it took $1 of new debt to create $1 of GDP (debt levels were much lower and capital usage was much tighter so new credit found its way into production), whereas today it takes $7 to $8 of new debt to create $1 of GDP.

YPSILANTI, Mich. — On a recent evening, Christine Moellering, 40, sorted through the plastic laundry basket where she keeps the family bills, statements and coupons.

“The Sears one is 32.24 percent,” Ms. Moellering said, reading a credit card statement with a balance of $5,955, including $155 in monthly finance charges. The high interest rate took her by surprise. “That’s nice,” she said sarcastically.

Ms. Moellering, and her husband, Mark, 39, earn average salaries for their age (together about $66,000 a year), live in an average-priced home and have an average cost of living. But like many other households these days, they have found that their day-to-day economic life has come to depend not just on how much they earn or spend, but also on how well they shuffle what they owe among a broad array of credit cards, home equity loans and other lines of credit.
Americans spent one in seven of their take-home dollars on debt payments last year, up from one in nine in 1980.


thanks to http://www.itulip.com/

>that is despite low fed funds rates interest rates compared to the double digits in 1980.....

>und das obwohl die zinssätze der fed deutlich unter den zweistelligen aus dem jahre 1980 liegen.....

Behind closed doors, the decisions families like the Moellerings make about their debt — when to pay it off, when to shuffle it to lower-interest sources and when to let it revolve and build — can determine how much their salaries are worth....

Their credit card debt came to $22,228, including $380 in monthly finance charges. Interest varied from 12.1 percent to 32.24 percent. The Moellerings also have a mortgage of $93,000 and a home equity loan balance of $68,574, at 8 percent interest. ......

Just a generation ago, financial profiles like the Moellerings’ would have been unusual. But changes in federal regulations since the 1980s, along with consolidation in the banking industry and changed consumer attitudes toward borrowing and saving, have made credit more widespread, more heavily marketed and more confusing, with offers of more credit — at low rates — extending to even the least reliable risk. In 2006, the industry mailed out nearly 8 billion credit card offers, up from 3.5 billion in 2000.

Credit card debt, less than $8 billion in 1968 (in current dollars), now exceeds $880 billion, more than tripling since 1988, adjusting for inflation, according to the Federal Reserve Bank. Penalty fees alone cost consumers $17.1 billion in 2006 — up from $12.8 billion in 2003, adjusted for inflation, according to R. K. Hammer, a bank card advisory firm. In part because of the debt burden, the consumer savings rate fell below zero percent in 2005 and has stayed there.

..... Mr. McBride said, as home values have increased and interest rates have dropped, home equity loans have enabled families to carry more debt — to buy more things — at lower cost.......

thanks to http://calculatedrisk.blogspot.com/

For the Moellerings, juggling balances and interest rates has enabled them to pay for things they could not otherwise afford, like their 2004 wedding and house renovation, or to eat out occasionally, when “we’ve both had a bad day at work,” Mr. Moellering said. He earns $36,000 a year as a software applications designer.

As foster parents of two children they also receive about $1,200 a month in reimbursement from the State Department of Human Services, which goes toward “food, general living and ballet lessons,” Ms. Moellering said.

When the Moellerings pay a bill late or exceed their credit limit, interest rates have shot up, increasing the monthly cost of transactions and heaping penalty fees on top.

The bills in Ms. Moellering’s basket described an uneven track record of managing balances and interest rates.


On March 27, Mr. Moellering used a debit card rather than a credit card to make nine purchases, ranging from $5.38 to $48, hoping to avoid finance charges. But he miscalculated their checking account balance. Each purchase incurred an overdraft charge of $32, or a total of $288 in penalties, more than the $221.82 cost of the purchases. (After some pleading, the bank, National City, forgave four of the charges, leaving the Moellerings with $160 in penalties, plus interest on both the fees and the principal.)

When the couple met through Yahoo personal ads in 2003, they did not discuss debt. She wrote that she liked snow; he said he looked like Babe Ruth. She had about $6,000 in credit card debt at the time, mostly from paying for books and living expenses after a return to college. She used credit cards rather than applying for lower-interest student loans. “I never tried to get student loans,” Ms. Moellering said. “I was working full time and taking care of my sick mom and trying to go to school, so I never had time, so I just ad hoc’d.”

Their debt escalated when they decided to get married. They paid for rings, a reception, a honeymoon and a new bathroom — about $50,000 in a seven-month stretch.

“In such a short period of time, there’s no way to do it other than credit card debt,” Mr. Moellering said.

He paid for some of the expenses through a home equity loan, and paid contractors with promotional checks that came with low interest for the first year. When money gets low, the Moellerings skip paying credit card companies rather than miss a mortgage payment.

“And if the cat gets sick or something, then suddenly we’re trying to figure out, what kind of card can we use to pay this $500 vet bill,” he said.

In the last two years they have managed to cut their credit card debt by $20,000, Ms. Moellering said, and have built a savings of about $5,000, thanks to a Christmas gift from a relative. Ms. Moellering contributes to her retirement account at work. Both say they could manage better if they only had the time.

Angst in affluent America, Part 2 / Greenberg

the commercial is a must see.... unbelievable. could be one for fools day......but it was real.

der werbeclip ist wirklich ein muss...schwer zu glauben das der real und kein aprilschwerz ist

SAN DIEGO (MarketWatch) -- You may have seen that LendingTree commercial with a happy-go-lucky guy named Stanley Johnson, who brags about his big house, his new car and how, "I even belong to the local golf club. How do I do it?" he continues with a big, dumb smile, "I'm in debt up to my eyeballs." Lowering his voice, but still smiling, he adds, "I can barely pay my finance charges." The smile doesn't leave his face as he drives a riding lawn mower, saying, "Somebody help me."


Thanks to easy credit, many Americans have been living well beyond their means. But that credit picture is beginning to change. And when you think about where the U.S. economy might be a quarter or two from now, you have to wonder how many Stanley Johnsons are out there. This isn't the stereotypical subprime borrower, with a spotty credit history and low credit score, but instead people perceived by friends and neighbors to be living the good life, some even sporting good credit scores.

With the mortgage markets tightening, especially as certain types of adjustable-rate mortgages face a wave of forced refinancings, we will know soon enough. For a preview, all you really need to do is check with someone like R. Douglas Ley, a certified public accountant and certified financial planner in Macungie, Pa. Many of his clients live in a wealthy part of New Jersey. He was the-then anonymous CPA mentioned here last week, in a story that prompted an avalanche of e-mails and postings on my blog. See blog ( excellent comments http://tinyurl.com/2jh9r2 !)


"I am shocked," he said at the time, "by the bad and deteriorating financial condition of many of my clients."

Much of what Ley said was merely anecdotes. Still, such stories suggest there are more Stanley Johnsons among us than we may think. There are plenty of people who are doing just fine. In fact, it appears, based on reports from some CPAs, that many who created wealth in recent years through wise investments or high-paying jobs still are genuinely wealthy. But it is the tales of trouble that resonate for anybody trying to figure out whether the equity in overinflated homes really was a large driver of the economy in the past few years. Based on conversations with CPAs, mortgage brokers, financial planners and others from all parts of this country, there is little doubt it played an important role.


thanks to http://calculatedrisk.blogspot.com/
größer/bigger http://tinyurl.com/2jdlf6

No region is better represented with ready-to-tell stories than Orange County, Calif. That is where, until 2005, Donald Parker owned a large insurance agency. He recalls how low mortgage rates spurred business in late 2001 with refinancings and home-equity lines of credit that required proof of insurance. "It really became excessive by the summer of 2004," he says.

"That's when I started noticing that many of my clients had either refinanced or added a second mortgage or home-equity line of credit multiple times within the prior three years often doubling or in some cases tripling their mortgage balances."

He adds that it wasn't the expansion of mortgage balances that was so alarming. "It was all the new, expensive cars being purchased and added on to their auto insurance," he says. "Often people were calling to replace a Honda Accord with a new BMW or Mercedes. We were also receiving a lot of phone calls from our customers asking coverage questions: for instance, 'Is my new Rolex watch covered if I lose it on vacation in Hawaii?' "

If CPAs and insurance agents are among the first to spot the problems while they are occurring, divorce attorneys like Bruce Hughes, also of Orange County, are among the first to see the actual fallout.
"We see it as it happens," he says. "From industry to industry over the years, they come in groups when various industries go through turmoil. Now it's real estate's turn. I can't tell you how many mortgage brokers, builders, developers and others associated with the building industry have come in for a divorce in the past six months and it's increasing." Those not associated with real estate, but hurt by the false sense of financial security because of it, are no doubt next. Calling Stanley Johnson.

"Beware the overpriced debt markets in 2007 / economist"

very good summary on the correlation of debt and other asset classes like equities. the first sign of trouble for the stockmarket will be trouble in the debtmarket like a big default or spike in spreads.

klasse zusammenfassung über das zusammenspiel von krediten und anderen vermögenswerten. die ersten probleme im aktienmarkt werden sicher mit problemen wie ausfällen oder einem ansteig der spreads im kreditmarkt einhergehen.

GENTLEMEN prefer bonds. If you look round the world for speculative excess at the end of 2006, there are many more signs in the supposedly staid world of debt than in the stockmarkets.(unfortunately they are closely correlated, dummerweise hängen diese beide eng miteinander zusammen)

Investors are enthusiastic about buying fixed-income assets, even though yields are low by historical standards and the returns on cash (particularly in America and Britain) are as attractive.

Many investors in shares argue that the low levels of bond yields make stockmarkets look cheap. To take one example, emerging-market bond spreads (the excess yield over American Treasuries) are close to all-time lows, according to Morgan Stanley, an investment bank, whereas emerging stockmarkets trade at their usual discount to developed-world shares. In the short term, the perceived cheapness of debt is persuading private-equity groups that they can make big profits from buying quoted companies. And the prospect of such bid activity is keeping a floor under share prices.


But there may also be structural reasons why investors are favouring bonds over shares. The first is that savers have changed. Pension funds and insurance companies in the developed world have become more cautious (thanks to regulation and the bear market of 2000-02) and are increasingly buying bonds in an attempt to match their liabilities. Furthermore, savers are no longer risk-happy Americans but Asian central banks, which have traditionally put bonds at the core of their portfolios.

A second reason is the massive growth of credit derivatives, which has given investors the ability to sample the debt markets so as to get exposure to the precise risks they find attractive. Debt is no longer just plain vanilla; now there is as much variety on offer as at an Italian gelateria; credit risk can be scooped out and separated from interest-rate risk; money can be made from predicting default as well as avoiding it. Rather than investing in a few, often illiquid, corporate-bond issues, investors have a host of vehicles to choose from..... Abundant liquidity has persuaded people to accept lower yields as a result.

All this has coincided with an exceptionally favourable period for corporate-debt markets. Companies have been extremely profitable, generating more than enough cash to service their debts; as a result, the default rate has been very low. Traditionally, low default rates have been associated with low spreads.

Of course, markets are supposed to look forward. All this good news might prompt investors to believe debt markets are close to a turning point. Indeed, corporate-bond spreads did edge higher earlier this year, before taking another downward lurch in the autumn.

The debt markets seem to offer little scope to absorb bad news. As Barclays Capital, a British investment bank, neatly puts it: “The entire asset class of bonds is characterised by symptoms of overvaluation and complacency.” ( they have fallen asleep...... / sind wohl eingedöst...)


But what will puncture that complacency? The most likely cause would be a big default. If the global economy slows next year, companies will find it more difficult to service their debts. And bid fever has prompted borrowers to take on more risks; according to Standard & Poor's, a rating agency, the average purchase price for European leveraged buy-outs has reached a record level of 9.4 times earnings before stripping out the costs of interest, tax, depreciation and amortisation.

The real test will come when spreads start to widen again. Will the rapid emergence of credit derivatives and the greater role of hedge funds make markets more—or less—stable?

There had been fears that hedge funds would be less willing than banks to stump up rescue money in a crisis. But the recent case of Polestar, a British printing group, showed that companies can be refinanced smoothly even if hedge funds are involved. In addition, plenty of distressed-debt funds specialise in taking positions when things look ugly.

Another fear is liquidity. Hedge funds have actively provided credit via leveraged loans. There is a risk that, just when borrowers get into difficulty, hedge-fund clients may demand their money back......

Plenty of people believe the financial system is more secure than before, because banks are not as vulnerable to the threat of corporate failures. The markets have survived the crash of big companies, such as Enron, an energy trader, and the downgrades of motor companies, Ford and General Motors, in recent years.


But the real test of a big recession has yet to be faced. If you want to dwell on one financial worry for 2007, the corporate-debt market is the place to start.