MarketWatch
The Great Unwind has begun, Citigroup warns
Avoid leveraged companies, countries and consumers, bank's strategists say
SAN FRANCISCO (MarketWatch) -- The Great Unwind has begun, Citigroup Inc. strategists warned on Wednesday.
As markets and economies de-leverage across the globe, investors should avoid companies and countries that have grown to rely too much on borrowed money, they said.
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During the last credit crisis in 1998, European banks were leveraged 26 to 1. In the early part of this decade, leverage grew to 32 to 1. Now the sector is geared 40 to 1 on average, according to Citi's European bank research team.
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However, even though some companies may not have much debt themselves, they may be exposed to over-leveraged customers or highly leveraged investors, Citigroup warned. Automakers, home builders and electronics retailers benefited as customers borrowed money cheaply in recent years to buy cars, houses and flat-screen TVs. That attractive financing is now being withdrawn.
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The difference, or spread, between interest rates on investment-grade corporate bonds and Treasury bonds has jumped in recent months, even though most companies aren't very leveraged. This widening may be caused by leveraged investors such as hedge funds having to sell good quality assets to meet margin calls, or requests for more cash or collateral.
"It is the leverage of the investors who hold these bonds that is now being brutally exposed," Matt King, a Citigroup credit strategist, said. "We are now confronted by a broad bloodbath in the credit markets," Citigroup said. "The most leveraged paper is falling in value because it is leveraged, and now the least leveraged paper is also falling in value because it is owned by leveraged investors."
Investors should also avoid hedge funds themselves, along with private equity, Citi added. Both types of investment rely at least partly on borrowed money to generate returns.
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Leveraged economies, like the U.S., should also be avoided, in favor of emerging market countries, which have reduced borrowing, the bank advised. With less capital sloshing around the world, and the dollar falling, the U.S. may have to compete more to finance its deficits. "The U.S. shows up as the world's greatest consumer of external capital," Citi noted. So it "has the most to lose as this capital becomes less freely available."
Ich weiss nicht, was an den Gerüchten über Island dran ist, aber so wie ich gelesen habe soll die Isländlische Währung "highly leveraged" sein.
Redest du mit mir? REDEST DU MIT MIR? 
