A sense of euphoria was to be expected in the year that followed the 2008/2009, when banks and borrowers had to work hard to keep their heads above water. And in the 12 months from May 2009 to April 2010, the scope of this report, the debt markets have started to resemble something like their old selves: loans first became widely available, and then, increasingly as the year went on, even became competitively priced. Bonds had an even swifter return to prominence.
But it has not all been good news. Towards the end of the period, the first tremors of what could be the next financial earthquake were felt, as Greece found itself on the brink of economic collapse. Concerted European action seems to have averted catastrophe, though the cost of bailout remains to be seen, both economically and politically. And even with the Greek question still not completely resolved, attention has turned to other European peripheral markets: Italy, Ireland, Portugal and Spain. Another bailout might be a bridge too far for some.
For now, indications are that austerity measures, coupled with the will demonstrated by the Greece bailout, have done enough to soothe many investors’ nerves. But it remains unclear to what extent markets will return to their pre-crisis states. The chastising experiences of the last three years will take many years to forget, by which time the regulatory environment is likely to have been transformed out of all recognition. The developments in the structured finance market, which has borne the brunt of regulators’ ire, are indicative of planned changes that will occur in other parts of the market, from derivatives to accounting.
From an industry perspective, one of the biggest risks now is ensuring that regulation is tailored to suit its stated purpose: protecting economies from a reoccurrence of the crisis, and ensuring companies, sovereigns and others have access to the financing they need to operate. Politicians have been showing an increasing inclination to use regulation as a stick with which to beat banks. While that may be a vote-winner in the short term, it is less likely to win approval if it has the unintended consequence of making financing vastly more expensive or harder to secure.
The other main risk is that, with so many countries and corporates tightening their belts simultaneously, the world is in for a period of severe economic hardship. In the loan market, banks are already being forced to compete fiercely for an evaporating pool of mandates, explaining a rapid deterioration in pricing. With borrowing totals this year well below those seen the year before (KfW led the borrowing this year, with US$87.86bn, compared with Freddie Mac’s US$144.65 last year), a continuation of this downward trend looks entirely possible.