Global “Dash for Cash” Puts Pressure on Debt Markets


Is this what a credit crunch feels like on the ground? Way behind the curve of my own domestic finances as ever, I’ve been trying to raise a fresh mortgage on my house – well, for around half of its outstanding value, at least.

In fact, I’m just one of 750,000 borrowers in the United Kingdom about to come out of a two-year fixed deal to find interest rates have risen from 4.50% to 5.75% since late 2005 – and all of the lenders I’ve approached just raised their rates.

Fair’s fair; alongside the spike in 10-year US Treasury yields – the global price of money in lieu of a gold standard – the long-end of the UK’s yield curve has finally caught up with the Bank of England. That makes borrowing money to lend it out again more expensive. It also represents a capital hit to the price of the bond underpinning the bulk of primary mortgage origination, too.

Five-year UK gilts closed last week yielding 5.75% – slap bang where the Old Ladies put the price of short-term money on Thursday. Ten-year gilt yields rose to 5.55%, up from 4.74% at the start of the year.

But three of the mortgage lenders now offering to keep a roof over my head also just raised the “spread” that their tracker mortgages charge above base lending rates. Two have also hiked their mortgage arrangement fees, too.

Here in London and the booming south-east of England, house prices have not even turned down yet, but the lenders are already racing to claw in money. And on the other side of the credit ledger, the same story.

Get cash at any price. It’s just not as cheap anymore – and it might be about to become yet more expensive. A friend with less money than gold was last week offered a 90-day deposit paying 8% per annum. US private-equity giant KKR now says it wants to float on the stock market after failing to raise leveraged finance in the bond market. The perceived risk of holding European corporate debt is shooting higher, according to the cost of buying credit default swaps.

The cost of insuring against a default by Rolls Royce, for instance, rose 16% this morning alone according to Deutsche Bank, after reports that private equity funds are circling, ready to buy up the engineering giant with money borrowed against Rolls Royce’s own future.

Credit default swaps for Air Liquide, the world’s second-largest maker of industrial gases, jumped 38% today after a report that KKR is considering a bid. Alliance Boots Plc just said it will assume £1 billion of the debt needed to fund KKR’s buy-out of the UK pharmacy chain. That pushed the price of CDS on Boots’ debt more than 9% higher this morning.

The sausage machine still needs meat, bread and sawdust, however, and eight further bond issues worth around €500 million each are scheduled for later this week, reports Bloomberg. For as long as the mincer keeps running, you might wonder, what’s the fuss? Money shufflers chasing a few pennies on the Pound will hardly make a difference to the cost of your daily loaf – already breaching the £1 mark (equivalent to a fresh quarter-century high of US$2.0245 at the time of writing), with the price of wheat set to extend its 53% gains of the last year thanks to the Australian drought, growing demand from China and India, plus the scramble for biofuel production in the US.

But financial institutions accounted for 78% of the world’s outstanding debt issuance in March, says the Bank for International Settlement. Debt sold by financial companies to other investment groups outweighed international stock market issuance nearly eleven times over. To young families buying a home, this dash for cash simply adds a few quid – or more than a few quid – to the monthly bills. In the debt markets, however, it’s already unwinding the blue skies, plain sailing forecasts of the last two decades.

Almost 60% of credit professionals surveyed by In-House Lawyer magazine think the bubble in Europe’s leveraged finance market is now “unsustainable”. Four in five of those gloomy professionals reckon the bust will strike inside 12 months. “European investors have had their fill,” said Luis Sanchez-Guerra, head of capital markets at Ahorro Corporacion Financiera in Madrid, to Bloomberg yesterday.

But fear not! If you can’t get your bond issue away to cheese-eating continentals, simply go west. “The Dollar market opens an avenue to new investors,” says Sanchez-Guerra. His firm, owned by 43 savings banks, plans to sell US$2 billion of notes backed by Spanish home loans into the US debt market. He might just find willing buyers, too.

“This [mortgage bond] market today is like corporate credit was in 2001 and 2002, especially like 2002, when you had a tremendous risk/return opportunity,” says Barak Laks of Alpha Beta Capital Partners. “The real money in bonds is made when they are trading on price, not spreads. The only problem is the path.”

In short, as John Dizard notes in the Financial Times, “we are in a liquidation phase for subprime housing debt…Not ‘the’ liquidation phase, because there will be several.”

The liquidation of 2007’s historic and global top in debt might also take a while to work itself out. “The complexity of this era of credit liquidation,” as Robert Smitley wrote of the Great Depression in ’30s America, “is far too great for the mob mind to grasp. It is hardly possible for them to see the picture wherein about US$700 billion dollars of physical and intangible wealth is attempting to be turned into about US$5 billion dollars of money.”

How much intangible debt now needs to be squeezed back into how much real money? It would be easier to find a cheap mortgage – with no ugly ARM once the teaser is finished – than guess at those numbers today.

Adrian Ash
for The Daily Reckoning Australia

Editor’s Note: City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at BullionVault – where you can buy gold today vaulted in Zurich.

Adrian Ash
City correspondent for The Daily Reckoning in London and formerly head of editorial at Fleet Street Publications Ltd, Adrian Ash has been studying and writing about the investment markets for the last 9 years. He is now head of research at BullionVault - giving you direct access to investment gold, vaulted in Zurich, on US$3 spreads and 0.8% dealing fees.
Adrian Ash

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