Moodys Investors Service expects the credit market turmoil spurred by subprime lending woes and the related flight to quality to last for months while a protracted repricing of risk takes place.
In a report released today, From Illiquidity to Liquidity: The Path Toward Credit Market Normalization, Moodys analysts anticipate the process could play out over the next six months.
The markets will reopen when secondary market prices rise, or inventories are marked down enough to sell, which should eventually occur, wrote Moodys Vice Chairman Christopher Mahoney, who co-authored the report, the first in a planned series of reports analyzing issues related to the subprime problem.
Mr. Mahoney noted there has never been a very deep secondary market for structured products, which is particularly a problem for leveraged players who will be forced to sell illiquid securities at discounted prices. In turn, this will bring more liquidity for that secondary market, which currently lacks buyers in the absence of efficient pricing. Often there is no bid at all, regardless of the price, Mr. Mahoney wrote. There is no way to mark to market.