Credit crunch set to worsen

The risk landscape for global credit markets is set to worsen as credit spreads continue to widen and de-leveraging becomes a greater challenge for central banks, according to the chief investment officer at Vianova Asset Management, Michael Schneider.

Speaking at the Australian Unity economic outlook briefing, Schneider said increasing inflationary pressure coupled with an increasing US budget deficit and rising commodity prices meant a worsening risk landscape.

“Until October last year there was supposedly a surplus of capital, particularly in the financial services, but now clearly there is a deficit,” he said.

“The key things that have conspired towards this expanding credit liquidity that occurred for most of the last 15 years were things such as Japan and China exporting deflation, the iron curtain coming down, Western credit and banking growth far exceeding economic growth, a deregulatory regime and ‘outcome driven’ financial engineering.

“The US has imported deflation from its major trading partners for a long time and has gotten the worst of both worlds, where their external sector is increasing and at the same time they’re importing inflation as opposed to deflation, which is placing a lot of interest rate risk and credit risk that still hasn’t been ameliorated.”

According to Schneider, we’re in the early stages of a massive Western de-leveraging caused by an unsustainable credit boom.

“Our assessment of current risk conditions could be described as the early stages of a real ‘hurt’ phase, notwithstanding the recovering credit spreads since March, there will be the risk of investor redemptions where ‘good’ assets are sold to pay for ‘bad’ positions,” Schneider said.