Credit markets face Sisyphean struggle, RBS says

Cover image of RBS' 2009 Credit Market Outlook

RBS’s credit analysts have released their outlook for 2009, and it’s not pretty.

Diving right in, emphasis FT Alphaville’s:

The global economy has slowed dramatically since the summer and we

enter 2009 facing the worst economic environment in a generation. A long recession looks priced in to spreads at these levels but a combination of heavy supply and rising defaults will see credit assets remain ‘cheap’ for some time to come. We will see fresh wides in spreads in 2009 and there is no need to pick an outright bottom just yet.

2009 will see a reassessment of credit as an asset class. Liquidity has a premium and cash and volatility are more highly valued in the current environment. This will have serious ramifications for the shape of credit curves as investors buy corporate debt as a means of yield enhancement and not in anticipation of capital gains. Longer-term credit is fast

becoming the ‘new equity’ whereas equity could well become the ‘new option’.

Parking cash in the senior debt of truly ‘too big to fail’ banks remains a

sensible strategy and we would add carefully selected corporates to that bucket also, particularly at shorter maturities given the current shape of credit curves.

Given the sense of gloom permeating the report, it’s clear that the team doesn’t want to repeat the mistakes of its outlook for 2008, in which “we may have been negative about the economic outlook, but not negative enough.”


And while a negative view of corporate credit was appropriate, we dramatically under-estimated how difficult it would be to re-liquify the financial system and how much damage would be done to banks’ balance sheets in the process. And that, in turn, feeds straight back into the real economy driving down the availability and up the price of credit, dramatically.

With consumer and business confidence drastically reduced as a result, the economic outlook is now significantly worse than it was at the start of the year. Our original concern, that this economic downturn would be long by historical standards, is intact. But any vestige of hope that it is

a mild cycle has been blown away.

Jacques Cailloux, our Chief European Economist, is forecasting the deepest Eurozone recession in over 50 years and, more imminently, US Q4 GDP data will likely show a contraction at a 4% annualised rate, the worst since the early 1980s

Oh dear.

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