|
RISKY BUSINESS
Modern global finance has moved
away from banks and towards securities, turning every conceivable
form of debt into a tradable asset. In this new financial order,
the solution to risk is to sell it to someone else, who repackages
it and sells it again. By the time it gets to the end buyer, the
risk is like a rummage sale sweater – nobody knows where it’s
been.
Over the past few months, international financial managers have
been scrambling to uncover the identity and nature of the risks
in their portfolios. In doing so, they are discovering some unpleasant
surprises, including the realization that the securities they so
highly rated were backed by subprime mortgages that are, by their
very definition, given to high-risk borrowers. And when these borrowers
lived up to their reputation, investors panicked.
The meltdown in the US mortgage market has rippled around the globe.
Hedge funds heavily leveraged on dubious subprime mortgages have
collapsed, private equity firms are hemorrhaging capital, and investors
are seeking shelter in lower risk investments. More ominously, an
abrupt contraction of the credit market is creating a liquidity
shortage that could fuel runs on otherwise solvent financial institutions.
Central banks have been mopping up the mess by injecting billions
of dollars into banks to help alleviate the credit crunch and stabilize
interbank rates. While this may prevent a solvency crisis today,
unless financial managers exercise more prudence in their application
of leveraged finance, a bigger crisis looms.
So far, Egyptian capital markets have found themselves distant enough
to weather the subprime fallout relatively unscathed. Egyptian global
depository receipts (GDRs), which list on foreign exchanges, felt
some pressure from global market volatility. Large-cap stocks on
the Cairo & Alexandria Stock Exchanges (CASE) also took a bit
of a hit as western institutional investors, who have been big players
in the market in recent years, withdrew from the market to cover
their positions at home. They also dumped about $1.5 billion of
Egyptian T-bills on their way out – enough to make the currency
wobble.
But overall, the CASE fared better than markets in North America
and Europe, whose indices shed over 10 percent last month. This
might lead Egyptian investors to breath a sigh of relief, but it
is almost certain that the repercussions of the US subprime mortgage
fallout will continue to roll our way for some time to come.
If anything, the global panic has demonstrated that leveraging risk
is like playing a game of musical chairs. But when the music stops,
there’s a good chance all the chairs have vanished.
CAM MCGRATH
Submit
your comment
Top
|
