Unraveling
Feb 14th, 2008 at 8:45 am by Susie
Coming to a town near you:
A collapse in confidence in a $330bn corner of the debt market has left US municipalities and student loan providers facing spiralling interest rate costs.
The implosion of the so-called auction-rate securities market - amid worries that bond insurers guaranteeing much of this debt could face rating downgrades - is the latest incarnation of the credit crisis.
The market, heavily used by municipal borrowers and backed by triple-A rated guarantees from bond insurers such as Ambac and MBIA (NYSE:MBI), was until now used as a safe harbour for investors.
The interest rates on such bonds reset either weekly or monthly and a lack of interest from investors can trigger a sharp rise to compensate holders.
The market’s sudden slump has pushed interest rates as high as 20 per cent for entities from the Port Authority of New York & New Jersey to a hospital.
