from Follow the Money

Kate-Moss-thin credit spreads

October 10, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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I never thought I would ever share space in an article with Kate Moss.   We do not exactly move in the same circles.  But William Pesek somehow found a connection - or a least a vivid metaphor.

If I were Dan Drezner, I would use Pesek's allusion to "Kate-Moss-thin credit spreads" as an excuse to post a photo of Ms. Moss.  Or even to argue that the credit spreads are not quite as thin as Kate Moss: Gisele Bundchen-thin credit spreads would be more accurate. 

Dan - hope that puts a smile on your face.

I am no Dan Drezner.  But I will link to the post that helped to generate William Pesek's column.   My concerns about the explosive growth of credit derivatives are clearly not shared by the markets, though I get the sense that the regulators (and Mr. Corrigan) are somewhat more worried.   And not just about the large backlog of yet-to-be-confirmed trades.    They also probably share the concern that Warren Buffet pithily expressed, namely that "when you combine ignorance with leverage you get some pretty interesting results."  (Buffet quote plucked from John Plender)

Ignorance may not be quite the right term - model risk may be more accurate.

The volume of outstanding contracts continues to grow.  And credit spreads remain rather thin - though perhaps Delphi's bankruptcy will change that.   However, from what Stephen Roach says, the credit markets seem inclined to shrug Delphi off:

Liquidity-driven markets remain more that willing to treat Delphi as largely an idiosyncratic risk that does not pose broader credit problems for Corporate America.  GM ripple effects may well draw that presumption into question -- especially for credit markets, where spreads remain historically tight.

I suspect the real risk here is not the most obvious risk.  Further trouble from US-based auto makers and auto parts suppliers should not be a surprise to anyone.   A real surprise might come from firms in currently strong sectors - sectors that whose growth must slow in any global "rebalancing" scenario.

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