Bank warns hedge funds of liquidity crunch
Financial News
William Hutchings
01 Aug 2007
Credit Suisse has warned hedge funds that banks' risk appetite, credit availability and global liquidity is in danger of evaporating "as fast as water off the desert tarmac", leading to more collapses such as that suffered by Sowood Capital, a $3bn (€2.2bn) US manager.
Credit Suisse warned in a paper by its fixed income analysts that banks are carrying a large exposure to new bond issues and, if they cannot sell them on, then "rightly or wrongly, the most natural response would be to sharply curtail other credit lines to hedge funds and smaller counterparties. Beyond a certain point that could precipitate a cascade of position liquidation".
The warning came the day after Sowood Capital, a US hedge fund manager, said it was winding down its funds. Its assets under management had been worth $3bn at the start of last month. It had been caught in a vicious circle of losses, margin calls and asset sales.
One banker said: "Sowood's mark-to-market losses led to more and more collateral demands by its prime brokers, and so it went on, until it could not pay any more."
The problem of falling risk appetite could easily spread, Credit Suisse warned. It might extend to the carry trade in foreign exchange, to commodity markets and to emerging markets.
"There would be a hiatus in the ability of private equity firms to secure funding for new deals," the report cautioned. |
