The FD’s FD: what credit crisis?

Stocks around the world have rebounded from their lows in March: the FTSE-100
is up 10%; the FTSE Eurofirst is up 9%; the S&P 500 is up 8%; and stocks in
Japan were up a remarkable 22% at the time of writing.

Does this signal that equity investors and the market more widely is
beginning to anticipate the end of the credit crunch? Are there signs, albeit
tentative ones, of the debt markets re-opening?

It is difficult to know what the answer is at this point, but certainly CFOs
should be wary of being fooled by recent signs of the crunch easing.

The macro economic picture is at best unclear; inflation is increasing
sharply, with the retail price index up 0.9% on the month and 4.2% on the year.

Expectations of UK interest rate movements have moved from two cuts over the
next year to increasing doubts that we will see further cuts for some time.

Corporate earnings remain relatively strong, 2008 has already seen more
defaults across the US and UK than in the whole of 2007, according to S&P,
and very few CEOs and CFOs are optimistic of the outlook for their company over
the next year.

So where does this leave the debt markets? Capital-constrained banks are
seeking equity injections to shore up their balance sheets, which will hopefully
bring some liquidity back into the debt markets. Key measures of debt market
risk appetite have shown some signs of recovery, and there are also tentative
signs that the bond markets are re-opening.

However, a lack of confidence and liquidity in the inter-bank market is
wreaking havoc with new debt raisings.

Margin flex language and its subsequent enforcement ­ even for blue chip
investment grade corporates ­ is increasingly common, and given the difficulties
faced by banks trying to sell down their exposures, CFOs currently raising
finance could easily see the spreads they have to pay for debt double, compared
with those they could have expected before the summer of 2007.

One thing is certain, for anyone currently at the coal face of raising
finance, the repercussions of the credit crunch are still apparent, and could
well be for some time to come.

Margaret Ewing is partner and vice-chairman of Deloitte.
She formerly served as CFO of BAA

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