Mon, Aug 27, 2001 page24

• Analysts warn rate cuts unlikely to spur economy

  • NY TIMES NEWS SERVICE
  • • 
    • 
    • 

  It was a law of nature, according to Wall Street. Whenever the Federal Reserve cut rates, the stock market moved higher in six months or so.

  Such was the chant in January, when Alan Greenspan began his most recent rate-cut crusade. But as the ensuing months in the market have shown, brokerage-firm gurus are better at salesmanship than science. The natural law they cited appears to have been suspended.

  Including the quarter-point cut last Tuesday, rates have been slashed by three percentage points this year. Yet the economy has weakened and the sure-thing bull market is missing.

  Notwithstanding the rally on Friday, the Standard & Poor's 500-stock index is down 10 percent for the year, while the NASDAQ has lost 22 percent.

  Investors appear to be recognizing that many woes faced by corporate America cannot be eliminated with a wave of Alan Greenspan's wand.

  The cold truth is, when borrowers are up to their eyebrows in debt, even the most aggressive interest rate cuts can't seduce lenders into making additional, and riskier, loans.

  Balance sheets are now dictating events. And these aggregations of assets and liabilities, whether they belong to a company or a consumer, are in awful shape.

  Corporate borrowing in recent years has been an unadulterated binge.

  In 2000, according to the Fed, corporations borrowed US$437 billion, almost double the amount raised in 1995. Corporate debt recently stood at 85 percent of gross domestic product, a record high.

  Now, however, lenders are pulling back. While lower rates have resulted in sizable bond issuance, Moody's Investor Services expects corporate debt to increase just 5.2 percent this year, well down from the 11.5 percent gain in 2000. And lenders, although willing, have demanded higher yields, compared with the risk-free benchmark.

  As long as the capital markets were willing to throw money at companies, they could spend more than they made.

  Now, even as the Fed has cut rates, liquidity provided by investors and lenders is drying up. Ravi Suria, the convertible-bond analyst who made several prescient calls at Lehman Brothers before moving to a hedge fund this year, saw early that the Fed's rate cuts would not propel lenders and investors back into an easy-money mode.

  In a report last Dec. 15 on the telecommunications industry, Suria compared Fed easing in the current environment to cutting the interest rate for a consumer whose credit card is already at the limit. ``It is unlikely that lenders will be willing to give a highly leveraged, noninvestment-grade company additional debt solely because the cost of primary funding for lenders has been reduced,'' he wrote.

  When technology was in the ascendancy, few people questioned the wisdom of using long-term debt to finance products with short life cycles. Only now, as some technology companies find that their debt exceeds the value of their enterprise, are questions being asked.

  During the boom, it was not rate levels that spurred corporations to borrow. It was the availability of money. Until lenders start refinancing these companies, the Fed will have only a supporting role in the play.
• Most Popular

  • 1

    US to deliver 10 new F-16s, source says

  • 2

    Taiwan blacklists Huawei and SMIC

  • 3

    Ma Ying-jeou’s forum speech regrettable, MAC says

  • 4

    Coco Gauff falls in Berlin after French Open victory

  • 5

    Costa Rica sent officials to train in Taipei, report says