Potential Credit Problems Becoming More Apparent
As if the market did not have enough to worry about, reports from various government agencies and from Moody’s highlight an increase in problem loans and a drop in credit quality. Of a total of $2 trillion in large business loans this year, 3.3% were considered troubled, as opposed to 2.0% in last year and 1.3% in 1998. A Federal Reserve official commented that this was something that they would need to watch carefully and give appropriate concern. Other federal regulators pointed to an overall easing of lending standards not only to business but to consumers as well. The Comptroller of the Currency found, for instance, that the percentage of consumer debt held in home equity loans was at a five-year high, and we already know, of course, that total consumer debt is at an all-time high. The regulators indicated that the banks could be unprepared for losses if the economy weakens. Consumer savings have been negative for the last few months, and it seems apparent that they have been borrowing to finance their spending while depending on the stock market to provide for their savings. This is a potentially dangerous game, which could easily unravel as the stock market stalls and the economy softens.
Moody’s also reported the steepest plunge in corporate credit quality since 1989, when the economy was suffering from ailing Savings & Loans, soaring bankruptcies and a falling junk bond market. The slippage was probably caused by the same factors triggering the recent slew of earnings warnings - a slowing economy, strong dollar and rising costs. Moody’s stated that companies with speculative grade ratings were hit with 75 ratings downgrades, compared to only 29 upgrades, the highest ratio of downgrades to upgrades in 11 years. That this deterioration took place during a period when the economy was still performing well should be a cause for some concern, as credit quality is likely to decline even more as the full effect of the Fed’ interest rate hikes becomes evident. All in all these credit problems will exacerbate the numerous other negative factors already bedeviling the market.
aus:
http://comstockfunds.com
Gruss, obelix
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