(Reuters) – Banks and hedge funds exposed to the riskiest parts of complex credit derivatives could face painful losses in coming months amid rising levels of corporate defaults, analysts say.
Billions of dollars in so-called equity tranches of synthetic collateralised debt obligations (CDOs) ride on an increasingly murky outlook for borrowers, threatened by higher interest rates, moderating global growth and pressure from shareholders to boost returns.
“In the past two or three years, anybody could borrow money because of huge risk appetite among lenders,” said Willem Sels, a strategist at Dresdner Kleinwort Wasserstein. “Now central banks are removing liquidity, and loan-loss provisions are rising — default rates should already be higher and will rise.”
