Capital Markets

Bernanke: Credit Stress Continues

The availability and cost of credit are weighing down the economy, says the Fed chairman.
Marie LeoneApril 2, 2008

Federal Reserve Chairman Ben Bernanke is expected to tell the Joint Economic Committee of Congress that the effects of the current credit crisis are not over yet. In a speech he is delivering on Wednesday, Bernanke asserts that although actions taken by the central bank – including interest-rate reductions and the installation of a credit facility for primary dealers – have appeared to stabilize the credit crisis, the markets remain under considerable stress.

Credit availability “has been restricted because some large financial institutions, including some commercial and investment banks … have reported substantial losses and writedowns, reducing their available capital,” noted the Fed chairman. And although some of the banks are in the process of bolstering their balance sheets, “the capacity and willingness of some large institutions to extend new credit remains limited.”

His outlook on the corporate debt markets was also cautious, Yields and spreads on both investment-grade and speculative-grade corporate bonds fell recently after rising through mid-March, he noted. One bright spot was the “robust” issuance of new investment-grade bonds so far this year. Nevertheless, issuance of new junk bonds “has stalled,” according to Bernanke.

In general, he stressed, the “financial strains on credit cost and availability have become increasingly evident. Bernanke’s comments mirror some of the findings of the most recent quarterly Duke University/CFO magazine Global Business Outlook survey.

Issued in March, the survey found that credit conditions have directly hurt 35 percent of participating companies through decreased availability of credit and higher interest rates (up 118 basis points on average).

The Duke/CFO survey culls the economic prognoses of more than 1,000 CFOs from a broad range of global public and private companies. John Graham, director of the survey and a finance professor at Duke’s Fuqua School of Business, is slated to testify before the Senate’s Small Business Committee on April 16.

The survey also noted that 60 percent of the companies polled have put off expansion plans in response to credit market unrest, with 20 percent delaying or reducing capital spending. Nineteen percent of the finance chiefs identified “other” effects of the credit crunch. Those included several concerns about their customers, including credit availability and the cost of credit, as well as late payments by customers.

CFOs also said they were worried about the difficulty they would encounter discounting or factoring receivables, recapitalizing their businesses, and dealing with a higher level of scrutiny from lenders.

To combat the credit crisis, 25 percent of those polled said they were delaying or reducing hiring plans, a cutback observed by Bernanke in his speech. The Fed chairman cited a “pullback in hiring,” noting that a reduction in capital spending fueled by “weaker sales prospects, tighter credit, and heightened uncertainty have made business leaders more cautious.”