Awakening Credit Markets Could Also Mean the Return of Risk

by Inya Ivkovic, MA

After almost a year to the day since Lehman Brothers collapsed and ushered the global markets into the Ice Age, the wheeling and dealing seems to be back. Capital markets seem to have found new life, as there was an eruption of new deals recently. Adding to the vigor were rallies in the secondary equity and debt markets as well, all courtesy of the obliging credit markets. However, the appetite for risk, carried by the rampant optimism, eerily echoes the boom years. Who knew it was possible to forget the bust years this fast, even if one of them happened not so long ago and still has not resolved itself.

Regulators and central banks must be uncomfortable right about now. They must not sap the rejuvenation momentum when they’ve done so much to enable it. But they were all very loud about calling for reforms of the global financial systems to go silent now before bringing any real change. And they cannot count on corporate America to help hold the torch. The latter’s memory appears much better, albeit it is self-serving, so it will not stop wheeling and dealing anytime soon, knowing how free-flowing capital markets can quickly grow cold.

So, the markets keep on racing ahead. One saving grace in the resurrection of the corporate financing is its sober and more purposeful undertone. At least the announcements of the new deals, be they IPOs or M&As, have lost the Russian roulette aftertaste that underpinned the credit bubble. The way it looks to me, the capital markets have regained control of their limbs, ending more than a year of being in a paraplegic state. This is bringing clear benefits to companies that have turned their backs to complex and vague financial concepts and have returned to basics. Now, it is all about expanding product lines, investing in research and development, restocking inventories and acquiring new resources. Staying in business and employing people seems to be everything we could have hoped for in this recovery.

But the road ahead is not so clear cut for everyone. Policy makers want to make sure that the mistakes of the past are never made again, which is why they are implementing tougher rules on bank capital, financial executives’ compensation, and tighter oversight of the financial systems. All this is aimed towards preventing and protecting the global economy from similar meltdowns happening ever again. I bet this renewed activity in the capital markets is both worrisome and desired – a dangerous combination at any time and even more so now, when memories of the recent meltdown are still raw and still hurting.