Since the liquidity squeeze hit the money market, Credit - along with everyone else - has been asking what it will take to bring about a return to stability. A recurring theme is that of confidence: the idea that if sentiment were buoyed by a few positive events - successful commercial paper redemptions, for example, or signs that the syndicated loan backlog was being addressed - people might feel happier about providing liquidity.
Confidence was at the root of last month's run on Northern Rock. Despite Bank of England claims that it was prevented by legislation from intervening covertly, once account holders became aware of the Bank's support for the mortgage lender they were concerned about their savings rather than reassured. A similar reaction occurs in the wholesale market: no matter how necessary central bank action might be during a crisis, it invites the question: do they know something we don't?
These questions are always worth asking, especially in the current climate, but natural caution is not the same as panic and the reputation of the credit sector as a whole should not suffer from Northern Rock's overreliance on the money market. As we note this month in our piece discussing the future of structured credit, the markets are experiencing a liquidity problem first and a credit problem second.
While the credit boom of recent years might be over, credit will still have its place in portfolios in the future; what the market must address now is how to restore confidence and avoid a repetition of the summer's turmoil. The emergence of a more liquid secondary market for structured products should help (see p. 36), as would a fundamental reappraisal of the way risk is examined - the most sophisticated models are only as good as the data fed into them, as Tim Fletcher of Baseline Capital remarks in our interview on page 44. It's up to every market participant - issuers, banks, rating agencies and investors - to decide the way forward.
- Matthew Attwood, Editor.