Risk Management

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A Specific Crisis at the Epicentre of an Earthquake - the consequences of the subprime crisis The subprime crisis is not just the epicentrer of an earthquake that occurred in the U.S., it is a crisis from which the aftershock, like a tsunami, quickly reached the shor es of the Eur opean markets, and particularly the monetary fund markets, which had been considered to be risk free and stable. More than just the single-handed cause of this crisis, we can think of subprimes as only the tip of a gigantic iceberg. The impact may be tremendous on a global level, including financial difficulties for certain credit institutions (such as Northern Rock, IKB and Sachsen), as well as doubt cast on an entire weakened sector, a lack of confidence in the interbank loan market, a rise in the cost of credit, and increased credit spreads even with a risk of credit crunch. Paradoxically, all of these consequences have occurred despite an extr emely liquid envir onment, with companies that have never been so financially healthy .

The subprime crisis is not just the epicentrer of an earthquake that occurred in the U.S., it is a crisis from which the aftershock, like a tsunami, quickly reached the shores of the European markets, and particularly the monetary fund markets, which had been considered to be risk free and stable. More than just the single-handed cause of this crisis, we can think of subprimes as only the tip of a gigantic iceberg. The impact may be tremendous on a global level, including financial difficulties for certain credit institutions (such as Northern Rock, IKB and Sachsen), as well as doubt cast on an entire weakened sector, a lack of confidence in the interbank loan market, a rise in the cost of credit, and increased credit spreads even with a risk of credit crunch. Paradoxically, all of these consequences have occurred despite an extremely liquid environment, with companies that have never been so financially healthy.

One big question still remains about these products. Who owns what? It is this lack of clarity that is causing problems. Did we really know what we were investing in? We can’t be too sure.

Repercussions for treasurers

Shortage and higher cost of credit

Treasurers have had to work twice as hard in these somewhat troubled times. Yet the golden rule of cash management should be applied at all times, particularly when the storm is raging. You must always have a financial ‘safety net’ to ensure the survival of operations. The best prepared treasurers had committed facilities and backup lines to ensure liquidity and compensate for the failings of the commercial paper (CP) market. They did not suffer too greatly from the increase in credit margins and the credit shortage. The treasurers who had to borrow during this period without previously signing an underwriting agreement saw their financing costs rise and the issue of their credit sometimes delayed. We can assume that the cost of this underwriting service will worsen in the coming months. Some bankers, particularly the Americans, have suffered from delays in setting up syndicated loans.

Fortunately, many treasurers have reaped the benefits of the financial health of their respective companies over the past few years. Many of them are sheltered because they have little or no debt.

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