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Anshu Jain, head of global markets, Deutsche Bank, and member of the bank's group executive committee, was on a day's visit to Mumbai before proceeding to Seoul and then Tokyo and back to London. Jain spoke to BT Online's Roshni Jayakar about global debt markets and implications to India. Excerpts: Q. What are the new trends in global debt market? A. There are two main trends. Credit spreads, or the difference between the rates at which corporates borrow and the risk-free rate, have widened to all-time wide levels. Globally, banks are pulling back from bilateral lending at a very rapid pace, so India is actually swimming against the tide when we talk about banks being 'flush with cash'. Yes, there is a lot of liquidity, but the willingness to take corporate risk globally is at an all-time low. The other trend, is an attempt by most central banks to revive flagging economies by cutting interest rates. We've got very low short-term rates and very steep yield curves. The big question mark is whether that is actually going to revive economies. Q. Why is the banks' appetite for corporate risk decreasing? A. There is tremendous amount of pressure on the banking industry to reduce the overall gearing. If you take Moody's ratings as an indicator, the agency has downgraded 20 times as many corporates as it has upgraded, which is typically the case in a recessionary environment. In such times, as corporate bankruptcies go up, banks are under tremendous pressure, and the feed-through impact on corporate lending is significant. Going ahead, banks' risk appetite will continue to shrink. Q. Any new funding options for corporates? A. There is credit realignment happening in global markets. The ability of corporates to bring secured debt to the market will greatly enhance the number of options and lower their overall cost of funding. The spread between secured and unsecured debt has changed very rapidly globally, and is sure to happen in India too. So let's say there is a company, which has large unsold inventory. There are two ways to finance it, one is to come to market as unsecured borrower and borrow money against credit paying capability. The other is through the securitisation market, whereby it can either securitise future earnings or do asset-backed borrowing. And credit spreads compress dramatically. For securitisation, the reality is that the underlying variable is irrelevant, as long as there is a relatively predictable flow of earnings. Q. Given the deteriorating credit environment and Deutsche Bank's reputation as a leader in derivatives, what is the next big thing here? A. I think that credit derivatives have revolutionised the risk management of corporate default. We have seen an absolutely vertical take-off in the usage of instruments like credit default swaps, CDOs (collateralised debt obligations), synthetic CDOs and so on. These are areas where India is still virtually dipping its toe in the water. Some statistics: globally, the total outstanding volume of default swaps has exceeded a trillion dollars in 2002. Volume has gone up 2.5-fold. This is an instrument that allows you to either take or hedge against the default risk of a particular corporate and the applications of this particular technology are unbelievable. Banks are using default swaps to hedge their loan books. Insurance companies are using default swaps to actually take exposure to insuring against the possibility of default on premiums. If I look at the debt landscape, I would say 2002 will go down as the year when the credit derivative industry came of age.
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