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Will Credit Risk Weigh Down Debt Markets?

Concern over the quality of debt investments worries investors.  Could liquidity in debt markets be drying up? Transcript of radio broadcast:

This is the VOA Special English Economics Report.

Liquidity is the ease with which an investment can be sold and turned into money. For example, when a stock is traded easily, the market for it is said to be liquid.

Liquidity can also suggest the ease with which money can be raised in debt markets. And this is where concerns are being raised. Offering credit always carries some risk that the loan will not be repaid. Now experts are saying that investors are as concerned about debt risk as they have been since two thousand one.

One way to measure investors' concern is by their willingness to buy new debt investments. Recently, banks, led by J. P. Morgan, postponed the sale of twelve billion dollars in bonds for the carmaker Chrysler.

The bond offering was part of a deal by private equity company Cerburus Capital Management to buy Chrysler from German carmaker Daimler. Reports say the deal is not in danger. But it could mean an increase in borrowing costs.

American markets are not the only ones in which banks are having trouble selling bonds. American private equity company Kohlberg Kravis Roberts hoped to raise over ten billion dollars in bonds. This was part of a deal to buy Alliance Boots, a European company that sells medicines. But a group of banks had to postpone the sale because of a lack of buyers.

Conditions for big deals by private equity companies appear to be cooling. Private equity companies depend on liquid debt markets to lend them money. And investors are less willing to put money into debt securities.

Part of this is the flight from risk involving investments based on subprime home loans. These loans carry lower than average credit quality but also pay higher interest rates. Credit rating agencies are now recognizing that investments based on subprime home loans are riskier than investors have thought.

Too many high-risk loans were blamed for the failure of the nation's second largest subprime lender. New Century sought bankruptcy protection from its creditors in April.

Investor flight from risk means that debt market liquidity could dry up as interest rates rise. But it is too early to tell.

The Federal Open Market Committee of the Federal Reserve did not change the federal funds rate when it met on Tuesday. The important interest rate remains at five and one fourth percent.

And that's the VOA Special English Economics Report, written by Mario Ritter. I'm Faith Lapidus.