Fed governor Randall Kroszner said today the Fed watches inflation very closely and raised eyebrows when he said at a nomination hearing that the real economy is unhurt by the subprime disaster. The Fed is expected to hold rates steady at next week's FOMC meeting. According to a WSJ report, futures markets now place a 90% probability on a Fed funds rate cut by January, after only 20% a month earlier. And Kroszner should check the Implode-O-Meter, where first worrying reports on non-subprime lenders begin to show up.
In Europe ECB president Jean-Claude Trichet hinted at a rate hike in September as inflations risks were to the upside.
Apart from the old structural macroeconomic problems on both sides of the Atlantic, especially high energy prices, a new problem emerges on the horizon. According to a story by The Times, American and European banks are stuck with almost $500 billion in leveraged loans they are unable to syndicate, putting an end to the recent merger bubble:
Leading investment banks on both sides of the Atlantic are saddled with almost $500 billion in agreed leveraged loans that they are unable to parcel out to other investors.The last thing markets need are higher rates. But if the ECB and the Fed want to stay credible they will have to follow the examples of their counterparts in Asia which have been raising their rates at a faster pace, adding to the weakness of the greenback.
New figures from Dealogic reveal that in Europe the banks are struggling to clear a backlog of $208 billion worth of leveraged loans that they would normally have sold on through syndication.
In the United States, the figures also show that investment banks are stuck with $269 billion of agreed loans that they are unable to syndicate.
News of the glut of debt on the banks’ balance sheets comes as the shake-out in credit markets produced new casualties as global markets were racked by further volatility.
In Europe, RBS has been left holding the biggest debt pile, with $18 billion worth of leveraged loans, followed by JPMorgan with $17.4 billion and Barclays Capital, which has lent $16.2 billion. All three banks were involved in the £9 billion of debt underwriting Kohlberg Kravis Roberts’ acquisition of Alliance Boots, the British health and beauty retailer, which got stuck this month, forcing the banks to hold more than £7 billion of the loans on their balance sheets.