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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: Jeff Jordan who wrote (21154)	10/31/1998 6:07:00 AM
From: IQBAL LATIF	Respond to of 50167

A very interesting article-- Business Week: November 9, 1998 Economic Trends A RECESSIONARY CREDIT CRUNCH? Market fears seem exaggerated There's no denying that U.S. financial markets have been undergoing something that looks like the start of a serious credit crunch. Spreads between yields on long-term investment-grade bonds and Treasuries have widened. Both the junk-bond and initial-public-offering markets have all but shut down. And issuance of higher quality corporate bonds has slowed sharply. The critical question is whether the current situation is likely to lead to a recession. No, says economist Maury Harris of PaineWebber Inc. ''What the markets are ignoring,'' he notes, ''is that alternate sources of capital are filling the gap for most borrowers, that corporate and individual borrowers are in reasonably good health, and that lenders themselves are relatively strong.'' While nearly all expansions are ultimately killed by a credit crunch, Harris points out that the current situation is unique in that market interest rates have generally been declining rather than rising, with the widening of most quality spreads resulting from an even sharper drop in Treasury rates. Only junk-bond rates have really risen. Moreover, whereas past credit crunches usually involved a constriction of credit from banks, the banks are actually stepping up to the plate and providing substitute financing this time around. In August and September, for example, commercial banks' business loans jumped by $20 billion, or a 14.3% annual rate, vs. an 8.4% pace in the first seven months of the year (chart). Large corporations have also turned to the commercial-paper market. And while issuance of domestic nonfinancial commercial paper surged at a 73% annual rate in recent months, commercial-paper rates have actually started to decline. Indeed, Harris notes, the $20 billion increase in bank loans in July and August, plus a similar rise in outstanding nonfinancial commercial paper, have partly offset what he believes to be a temporary drop in bond-market financing. With such credit sources helping to fill the gap for now, Harris thinks the markets will soon come to realize that the credit-worthiness of borrowers is much stronger than in earlier business cycles. Corporations have lower debt burdens than in the late 1980s, for example, and relatively low interest rates translate into far lower debt-servicing costs. Commercial-real estate delinquencies and both home-mortgage and consumer-loan delinquency rates have also been declining. And with only a handful of money-center banks exposed to hedge fund woes, most U.S. banks are in far better shape than they were at the start of the last recession when they were still feeling the devastating impact of bad real estate loans. BY GENE KORETZ