Credit Crisis to Deteriorate on Credit Derivative Debacle
Interest-Rates / Credit Crisis 2008


Jun 24, 2008 - 06:17 AM
By: Mark_OByrne

Interest-Rates
Best Financial Markets Analysis ArticleGold closed at $984.40 in New York yesterday and was down 17.30 cents and silver closed at $16.76, down 57 cents.

Gold rallied in Asia and in early European trading to recover some of yesterday's sharp losses. Oil has risen to near record highs, above $138 a barrel again this morning and the dollar has given up much of yesterday's gains (1.557 to the Euro) and this is likely leading to gold buying.


All eyes are on the Federal Reserve's interest rate decision tomorrow and this could lead to traders being reluctant to take large positions -long or short. Markets are expecting no change as the Federal Reserve grapples with its most challenging environment since the stagflation of the 1970's. Thus, the Fed is widely expected to hold rates at 2% (leaving real interest rates negative) with market participants hoping the accompanying statement will provide clues on future interest rate policy.

Credit Crisis to Escalate on Credit Derivative Debacle
Further confirmation that we are in the early to middle stages on the credit crisis and that a new more severe phase may soon begin was seen in the latest downgrading of the bond insurers, Ambac and MBIA, and the attempts by these bond insurers to try and ‘wipe out' $125 billion of insurance of risky debt securities in order to try and protect them from possible collapse.

The FT reports that “discussions about "commuting" these insurance contracts, which were sold by the bond insurers to banks in the form of credit default swaps (CDS), have taken on a renewed sense of urgency amid a rash of rating downgrades in the bond insurance sector. . . . The talks centre on CDS contracts issued by bond insurers to guarantee payments on collateralized debt obligations (CDOs), complex debt securities often backed by mortgages that have plunged in value amid a wave of foreclosures .â€