Business

Monday November 10, 2008

Credit crunch persists

BETWEEN THE LINES by C.S.TAN


Interest rates have declined in the US but banks are not lending much as they are unable to securitise and sell off their loans. Banks there need to continually raise funds by selling off loans due to insufficient deposits and a low national savings rate.

INTEREST rates have steadily fallen back in the US and Europe where governments have provided billions of dollars to the banks and money markets.

The banking crisis seems to have passed, and Bloomberg cheered the decline of the dollar-denominated London interbank offered rate (Libor) to which alot of the loans in the US is pegged.

Libor has dropped to 2.39% from a high of 4.8% last month, and is even lower than before the credit crisis. That is worth cheering, but while interest rates have eased, the credit cycle of tight money has not.

After many years of easy money, people forgot there are credit cycles that accompany the boom-bust cycles of stocks markets and the business cycle.

Credit cycles of tight money go hand in hand with periods of recession when bad debts weaken the capital structure of banks and as collateral values diminish. This usually follows periods of easy credit and loose lending standands.

Looming bad debts in developed economies towards the end of the week spooked markets again. Las Vegas Sands Corp said on Thursday it may default on debt. The casino group has loans arranged by Citigroup Inc and Goldman Sachs Group Inc, which deepened fears of risks in the two banking groups.

On the same day, Australia’s ABC Learning Centres Ltd failed, putting into doubt the loans of A$762mil it owes to that country’s biggest banks.

A key factor for the continuing credit crunch is the inability of banks in the US to securitise loans and sell that to institutions. They had done that with subprime home loans before, but they can’t do that even with higher quality loans now.

Just one securitised loan package of US$500mil was done last month compared with US$50bil in the corresponding month last year, according to the Wall Street Journal.

When banks can’t securitise and sell off the loans, the load of loans on their balance sheets will rapidly get heavier.

In the US, the average loan-to-deposit (L/D ratio) is more than 100%, which means they gave out more loans than the deposits they took in. This came about from excessive lending before this, and the low savings rate.

The Singapore government may have to support or aid the Marina Bay Sands project financially to ensure its development is not delayed or halted

The loans were not funded by deposits. The banks’ inability to re-finance the loans is curbing their lending activities, which in turn will be a drag on economic recovery in the US. In Malaysia, the L/D ratio is about 75% which provides ample room for credit expansion.

Singapore’s Sands

The financial problems of Las Vegas Sands Corp extend to Singapore where the group is building the US$4bil Marina Bay Sands integrated resort.

Sands Corp’s difficulties could lead the project to be delayed or halted altogether. In view of the importance of the project to Singapore’s tourism plans, however, the government is expected to support or aid it financially.

In the meantime, Singapore banks have exposure in their lending to this project, which could lead to sizeable doubtful debts.

Sands Corp is highly leveraged with debts, comprising borrowings 3.8 times that of its shareholders funds.

There have been concerns that Sands Corp faced bankruptcy risks, which caused the stock to plunge since the start of the year.

Sands Corp is a stark contrast to Genting Bhd, a cash-rich group which incidentally is also building an integrated resort in Singapore.

Liquidation lingers

It was reported here last week that hedge funds in the US were hit by redemptions of US$43bil in September. The bleeding continues.

Investors continue to withdraw huge sums from hedge funds, especially those that lost a lot of their money last month.

Redemption levels were about 5% last month but there’s been a rush for redemptions of as high as 25% in some funds, the Wall Street Journal reported on Friday.

Investors in Highbridge Capital Management, which manages US$17bil, asked for their money back, amounting to 15% of the funds, by the end of the year, the Journal said.

Many other hedge funds have suspended redemptions as they are unable to sell out their investments to pay back their investors. Such suspension is occurring every other day, according to other media reports.

The sell-off by hedge funds to meet redemptions leads to continuous selling pressure in both the US and emerging markets, especially as hedge funds tend to invest in shares which they pledge to banks for cash to speculate in derivatives

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