The present conditions in debt markets follow 12 months of instability that had its origins in the US sub-prime mortgage market and sub-optimal risk pricing in international capital markets for some years. The asset write-downs, lack of liquidity and low confidence in the market that followed, led to a repricing of risk, a significant increase in spreads (risk premiums) in interbank markets and higher corporate borrowing costs. These conditions were recognition of the deterioration in risk management practices in the financial services industry and lack of trust in financial institutions and capital markets over the preceding 12 months. A decade of low interest rates, bank asset disintermediation and high leverage in buoyant market conditions created circumstances for a pro-cyclical correction which was amplified by tighter liquidity conditions (Reserve Bank of Australia, 2008).
Capital markets in Australia and overseas are presently characterised by:
1. Historically low share prices
2. Limited opportunity for new on-market capital raisings
3. Reduced activity in mergers, acquisitions & divestments
4. A fall in asset values at odds with underlying fundamentals.