Credit squeeze sparks global equity sell-off

Global equity markets fell yesterday as investors, spooked by the recent jitters in the credit markets, looked to take refuge in less risky stocks.

Share prices around the world plummeted yesterday, as the recent jitters in the leveraged loan market spooked investors into selling off riskier stocks.

The sudden disappearance of liquidity in the credit markets has made it almost impossible for the big investment banks to sell on the loans they have made to support large leveraged buyouts, leaving them stuck with billions of dollars of extra risk on their balance sheets. This has sent share prices plunging across the sector.

It has also become almost impossible for new deals to be financed, meaning that many of the publicly-listed companies that have been trading at a premium in expectation of a private equity approach also saw their share price drop.

The result was that indices fell across the globe. In London, the FTSE 100 index of the biggest listed companies fell by 3.2 per cent to 6,251.2, its worst one-day fall in more than four years, and continued to slide this morning, falling as low as 6,192.30 in early trading. In New York, the S&P500 index and the Dow Jones industrial average both closed down 2.3 percent, while in Japan, the Nikkei fell 2.4 percent to hit a three month low.

The Wall Street banks that have been the biggest lenders to private equity – and have been left bearing the brunt of the exposure as a result – all saw their stock prices fall. Some of the worst hit were JP Morgan, which closed down 2.63 percent, Citigroup, down 2.85 percent, and Goldman Sachs, which plunged 3.96 percent.

Investors chose instead to pile into safer stocks – the yield on 10-year US Treasury bonds fell to 4.79 percent, down 11 basis points.