Credit Market Fall-Out #13 – The Problems in the US are Spreading Overseas

The problems that we are experiencing in the US are spreading overseas, from Market Watch. This was expected and it demonstrates how linked the various international markets are. The question is, what is the level of coupling (de-coupling) that exists between the US credit markets and similar markets overseas.

Behind the latest sell-off in the Dow Jones Industrial Average was an erosion in credit-market confidence that has plunged international corporate bonds along with emerging-market debt into an accelerated retrenchment, analysts said.

"The fact is we live in a general equilibrium world," said Paul Kasriel, chief economist at Northern Trust. "Everything affects everything else and [the U.S. housing slowdown] is spreading to other parts of the economy and the credit markets."

What began in recent months with the collapse in the subprime-mortgage financial sector has led to a ripple effect devastating a number of hedge funds, including two that are part of Bear Stearns.

Increasingly investors are refusing to provide Wall Street firms with cheap money to finance leveraged buyouts, a key source of support for the stock market. Some defensive institutions reacted this week to unsubstantiated market rumors about German and Japanese funds taking a hit from bad U.S. home loans, Kasriel said.

. . . . "This is a global problem," said T.J. Marta, fixed-income strategist at RBC Capital Markets. "Optimists say that because the markets are global we are spreading out the gain, but also spreading any losses."

"Pessimists say that the issue will hit a psychological tipping point and because it is a global problem it will be felt broadly in many places," he said. . . . .

"The private-equity players were able to convince the investment banks to guarantee funding at very high leverage levels," he said. "The problem is that banks now have a huge number of pending deals that outside investors aren't willing to buy. That's going to put a lot more pressure on secondary markets."

On Wednesday, the $10.3 billion leveraged buyout of popular U.K. retailer Alliance Boots PLC was delayed because banks arranging financing for buyer Kohlberg Kravis Roberts failed to sell senior loans backing the deal.

. . . . John Atkins, fixed-income analyst at IDEAGlobal.com, said the delay in the Boots deal is souring the mood for bond markets in continental Europe, where investors tend to more risk-averse than in the U.S.

"Will there be big differentials for the LBOs and their underwriters between here and Europe, where syndicates tend to be more risk averse than [in the U.S.]?" Atkins said.

"That's going to be a big issue," he said. "If it's getting this bad in the U.S., it's going to be much worse in Europe.