## Rising Credit Risks ## Source details **Canonical URL:** [Rising Credit Risks](https://www.imf.org/-/media/files/publications/fmu/charts.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fmu/charts.pdf.md) - [Structured JSON version](/-/media/files/publications/fmu/charts.pdf.json) --- ### Credit Risk — U.S. Subprime Mortgage Deterioration - There has been substantial credit deterioration in the U.S. subprime mortgage market in more recent vintages, especially 2006. (Source: JPMorgan Chase & Co.) - Subprime 60-Day Delinquencies by Mortgage Vintage Year (adjustable rate mortgages, in percent of payments due) are shown for vintages 2003, 2004, 2005, 2006 across "Months after Origination" (0–80 months). (Source: JPMorgan Chase & Co.) - Relaxation of credit standards noted, particularly in issuance of interest-only adjustable rate mortgages and mortgages with little documentation. (Source: Freddie Mac) Underwriting Standards in Subprime Home-Purchase Loans (Source: Freddie Mac) - 2001 73.8% 0.0% 28.5% 39.7 84.04 - 2002 80.0% 2.3% 38.6% 40.1 84.42 - 2003 80.1% 8.6% 42.8% 40.5 86.09 - 2004 89.4% 27.2% 45.2% 41.2 84.86 - 2005 93.3% 37.8% 50.7% 41.8 83.24 - 2006 91.3% 22.8% 50.8% 42.4 83.35 ### Credit Risk — Corporate Credit Markets - Parallel weakening of credit discipline in corporate credit markets, seen in "flexing" of deals in favor of borrowers. (Source: Standard & Poor’s) - Flex and Reverse Flex Deals (in percentage of deals) are plotted for 2000–2007 showing terms flexed in favor of borrower and in favor of lender. (Source: Standard & Poor’s) - Volume of "Covenant-Lite" Loans (in billions of U.S. dollars) increased markedly from 1997 through 2007 (Jan-Jun). (Source: Standard & Poor’s) - Rising leverage in LBO deals: Debt Multiples on Private Equity LBO Deals (U.S. deals with EBITDA cashflows > $50 million) show Total Debt/EBITDA and Senior Debt/EBITDA across 1997–1Q07/2Q07. (Source: Standard & Poor’s) ### Market Risk — Credit Market Turbulence ### Trigger and Immediate Effects - Troubles at hedge funds managed by Bear Stearns were revealed on June 15, leading to an accelerated pace of spread widening on collateralized debt obligations (CDOs) backed by lower quality mortgage-related collateral. (Source: JPMorgan Chase & Co.) - Primary Market Spreads of Mezzanine CDO Tranches over LIBOR (in basis points, CDOs with collateral of BBB average quality) are charted for Jul-06 to Jul-07 by tranche rating AAA, AA, A, BBB, with a marked increase around June 15. (Source: JPMorgan Chase & Co.) - Corporate Credit Default Swap Spreads (in basis points) for US Investment Grade (CDX Main), US Subinvestment Grade (CDX Crossover), Europe Investment Grade (iTraxx Main), Europe Subinvestment Grade (iTraxx Crossover) show widening between June 15 and July 9. (Source: JPMorgan Chase & Co.) - Cost of Insurance against Default by U.S. Financial Institutions (5-year coverage) increased for Goldman Sachs, Bear Stearns, Merrill Lynch, Lehman between June 15 and July 9. Note: Annual cost of coverage for $10 mn face value of senior debt, in thousands. (Source: Bloomberg L.P.) ### Ratings and Downgrades - Concerns intensified after ratings agencies began to downgrade subprime mortgage-related securities on July 9. (Source: Bloomberg L.P.; JPMorgan Chase & Co.) ### Broader Markets — Resilience and Flows ### Market Volatility and Asset Flows - Turbulence was mainly confined to credit markets; flows to emerging market mutual funds saw little impact. (Source: Emerging Portfolio Fund Research, Inc.) - Cumulative Net Flows to Emerging Market Funds (in billions of U.S. dollars) for Bond Funds and Equity Funds are charted from Jan-06 through Jul-07. (Source: Emerging Portfolio Fund Research, Inc.) - Implied volatility picked up since June but remained below long-term averages. Market Volatility Indices (z-score of implied volatility across Treasuries, Currencies, Equities) plotted for 2004–2007 show deviations measured in standard deviations from period average. (Sources: Bloomberg L.P.; IMF staff estimates) - Selected Asset Class Returns (In Percent, May 31 – July 19) include labels such as EM Equities, Carry Trades, Gold, Mature Equities, Dollar Index (DXY), US Crossover, Europe Crossover, Leveraged Loans, VIX, Subprime Mortgages. (Sources: Bloomberg L.P.; and JPMorgan Chase & Co.) ### Emerging Market Flows — Strong Financing, Especially to Eastern Europe ### Aggregate Financing Trends - Financing flows to emerging markets continued to grow, with flows to emerging Europe picking up sharply. (Sources: Dealogic; IMF, International Financial Statistics) - Emerging Markets Total External Financing (in billions of U.S. dollars) charts Loans, Equities, Bonds from 1993-Q1 through 2007-Q1. (Source: Dealogic) - Issuance of International Securities by Region (in billions of U.S. dollars) and International Bank Lending by Region (in billions of U.S. dollars) show notable increases for Emerging Europe across 2000–2007. (Source: IMF, International Financial Statistics) - Trading volume in emerging debt markets shifted toward local market instruments; Emerging Market Debt Trading Market Share by Instrument shows rising Local Market Instruments share through 2005. (Source: EMTA) ### Correlation and Credit Growth - Correlation of Credit Growth with Foreign Bank Financing (In Percent, yoy, 2004-06) shows R2 = 0.28, with scatter of Foreign Bank Financing vs. Credit Growth — heavy foreign bank borrowing helped foster rapid private sector credit growth in some countries in emerging Europe. (Source: IMF analyses) ### Emerging Market External Financing Tables (selected lines as presented) - GROSS ISSUANCE BY ASSET162.1135.6199.8286.7410.0501.7103.5126.7101.9169.6133.3151.044.853.6 30.2284.3 - Bonds89.061.699.8135.1189.2182.950.437.034.161.568.672.718.810.3 10.9141.3 - Equities11.216.427.845.478.2120.622.330.320.747.426.048.913.816.35.675.0 - Loans61.957.672.2106.2142.5198.230.859.547.160.738.629.412.227.1 13.868.0 - GROSS ISSUANCE BY REGION162.1135.6199.8286.7410.0501.7103.5126.7101.9169.6133.3151.044.853.6 30.2284.3 - Asia67.553.988.8123.3151.3195.338.547.335.573.938.563.323.922.7 11.7101.8 - Latin America53.933.443.354.385.968.717.115.415.820.432.816.86.14.75.349.6 - Europe, Middle East, Africa40.848.367.7109.1172.7237.848.064.050.675.262.070.914.826.3 13.2132.9 - AMORTIZATION BY ASSET147.0128.4119.5128.1111.2105.522.129.628.925.026.230.49.57.4 12.856.6 - NET ISSUANCE BY ASSET15.27.380.3158.6298.7396.281.497.173.0144.6107.1120.635.346.2 17.4227.7 - NET ISSUANCE BY REGION15.27.380.3158.6298.7396.281.497.173.0144.6107.1120.635.346.2 17.4227.7 - SECONDARY MARKETS (selected lines) - EMBI Global (spread in bps)728725403347237171191218208171170181167155181181 - Merrill Lynch high yield (spread in bps)795871418310371289313335344289285298274246298298 - US 10 yr. treasury yield (yield in %)5.053.824.254.224.394.704.855.144.634.704.655.034.624.89 5.035.03 - Equity indices and percent changes (selected): DOW, NASDAQ, MSCI Emerging Markets index, Asia, Latin America, EMEA are listed with period percent changes as presented. (Sources: Bloomberg L.P.; Capital Data; JPMorgan Chase; Morgan Stanley Capital International; and IMF staff estimates) - Note: Issuance data (net of US trust facility issuance) are as of June 30, 2006 close-of-business London. Secondary markets data are as of noon, June 30, 2006 cob New York. --- _Source: https://www.imf.org/-/media/files/publications/fmu/charts.pdf_