We’ve written before about the failure of the Fed’s policy of cutting short-term interest rates — seven times since September 2007 — to spur liquidity in the credit market.
The good news today is that there is “significant improvement in the credit markets since late March,” according to the Wall St. Journal.
The bad news, also reported by the Wall St. Journal, is that this recent thaw in the credit market is not expected to last:
“‘Most of us are anticipating two steps forward, one step back and carefully watching where the markets can handle deals,’ said Tyler Dickson, who oversees capital raising at Citigroup.”
“‘There’s no question the tone in the market is getting better,’ says Jim Casey, co-head of leveraged finance at J.P. Morgan Chase. He adds, however, that ‘there is some concern that this might be a short-term window of opportunity for issuers, since investors are still very focused on default rates and the potential severity of a recession.'”
“‘Risk tolerance is still pretty low,’ says Daniel Toscano, a managing director of leveraged and acquisition finance at HSBC Securities in New York.”
“Banks and debt investors are treading carefully,” the article said. “Investment banks, which incurred big losses after selling a lot of buyout debt at heavily discounted prices, are committing only to deals they can underwrite at a profit. And investors don’t want to be caught wrong-footed if corporate defaults spike.”
We think that the report of a credit thaw is premature. For most businesses and individuals, the credit market is still frozen solid.
Blackstone Group LP President Tony James appears to agree with us. James told Bloomberg News that banks are mistaken if they think credit markets have begun a sustained recovery.
Rather than a real break in the dismal credit forecast, James said that this little patch of sunshine may be “the eye of the hurricane.”
There is clearly no de-icing of the credit market that would significantly impact the housing crisis or allow Fed Chair Ben Bernanke to sleep without getting the chills at night.