It wasn’t supposed to be like this.
When policymakers in the developed economies took concerted action in late 2008 there was a widespread determination to prevent the recession turning into a prolonged period of depression. Record low interest rates, a little harmless inflation and a stiff dose of banking reform were meant to get the world economy turned round and back on a path of sustained growth. And growth was going to be the key to taking the sting out of reducing indebtedness – governments, financial institutions and consumers could all cut their borrowings without feeling too much pain.
But something has gone badly wrong. Growth forecasts are being cut around the world and the global economy as a whole looks set for a protracted period of slow and bumpy progress at best. That prospect is putting enormous pressure on the international financial system – and it is the debt capital markets that will have to take the strain.
In this special report IFR looks at the key developments taking place now and assesses the strengths and weaknesses of some of the major players and asset classes as borrowers and investors struggle to adapt to the changing risk environment.
We start by taking a look at the ratings agencies as they try to restore their battered reputations and defend themselves against accusations of incompetence and bias. Then we focus on the epicentre of the storm – the unequal battle between political ambition and economic reality being fought out over the future of the euro. We assess the options for the eurozone governments, and in particular how far the EFSF and ESM can leverage the Triple A status of a limited number of sovereigns into a comprehensive debt management instrument.
The covered bond market – another route to exploiting high credit ratings but beset by its own problems – has been a vital source of funding for Spanish and Italian banks this year but the turmoil in Europe’s peripheral countries has left participants in the market anxious.
And that is only one of the problems facing European banks. Whether or not massive government funding is available for recapitalisation, the next few months will be one of the most critical periods they have faced.
Middle East DCM activity has succumbed to the global trend, but bankers in the region are hopeful for 2012, even though declining global growth prospects are bound to have a negative effect on oil prices. Meanwhile, FIG issuers looking to Japan are seeing a mixed picture.
The most obvious beneficiary of the difficulties afflicting both the US dollar and the euro has been the offshore renminbi market, and we take a detailed look at the next steps for this important new asset class.
In LatAm the rush to embrace deals denominated in Brazilian Reais and other Latin American currencies proved short-lived as forex volatility increased, boosting risk aversion. Bankers in the region have not given up, but deals will have to be bigger and investors will be seeking more.
Corporate treasurers are having to be on their toes as issuing opportunities are proving fickle. The tempestuous funding environment has foisted greater responsibility on the role of treasurer, who is having to apply the lessons of Lehman against a rapidly changing economic backdrop.
The collapse of growth prospects ought to be ringing alarm bells throughout the high-yield sector, but we discover a more complicated picture. Many treasurers at lower-rated corporates in Europe are certainly looking with trepidation at the difficulties of refunding in the coming months, but in the US there is a feeling that much of the bad news has already been priced in and default rates will prove lower than market pricing suggests.
The investment-grade dollar bond market remains the most active and amenable capital market in the world, and volumes this year are not much short of last year, but we dig a little deeper to see how things have changed.
The high-yield sell-off has been a wake-up call for banks, many of which had been bolstering their teams to take advantage of the asset class. The tide has now turned and investors have realised they can name their price as liquidity has dried up in the face of fears over the eurozone and collapsing growth.
Among politicians, the debt capital markets were assigned much of the blame for the 2007 financial crisis but – four years down the line – they will be called on to play a crucial role in transmitting any new policy initiatives from the G-20 conference rooms to the global economy. The next twelve months are likely to be among the most challenging DCM professionals have ever faced.
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