Credit Market Fall-Out #11 – An Assessment From Moody’s About the Credit Markets

Below is an assessment from Moody’s about the credit markets from Bloomberg. I tried to get the original report from Moody’s but did not have much luck. My problem with their assessment is that as long as there is liquidity there should be no disruptions in the market. The issue with liquidity is that it is there until it isn’t.

The credit market rout caused by the slump in U.S. subprime loans gives ``serious reasons to worry'' and is a ``reality check,'' without posing a systemic threat, according to Moody's Investors Service.

While the turmoil has caused some investors to reassess credit risk, others are ready to acquire assets at lower prices, given the ``ample liquidity'' available, Moody's said in the report. The readiness to buy means there is no generalized threat to the integrity of the financial system, Moody's said.

``Risk reappraisal is welcome at this juncture,'' the analysts wrote. ``It does not have to generate disruptions of a systemic nature.''

At least 35 bond and loan deals worldwide were canceled or restructured in the past five weeks because of turmoil caused by losses in subprime mortgages. . . . .

The Moody's report is titled ``Summer 2007: Another False Alarm in Terms of Banking Systemic Risk but a Reality Check,'' and was prepared by a team of analysts led by Pierre Cailleteau, the New York-based firm's chief international economic analyst.

The collapse of the Bear Stearns hedge funds has caused investors to shun collateralized debt obligations, securities that repackage bonds, loans and their derivatives into new debt. Demand from CDOs for new debt was one of the engines behind a credit boom in which financial companies gave mortgages to people with poor credit histories and little or no documentation.

Investor ``nervousness'' probably will endure until the size and location of losses is known, the analysts said. This ``is unlikely to be soon and headline risk will probably test markets' nerves,'' according to Moody's.