News & Resources

Credit risk might be decreasing

Feb 04, 2013 Walt Wojciechowski

Throughout the first several weeks of 2013, political uncertainty in the United States and abroad has led to a variety of economic issues. Credit risk managers have to keep up with markets and goings on in Washington to ensure that they are making the best decisions for their companies. As the market has fluctuated nearly every day, these professionals have a difficult task ahead of them.

The debt ceiling in the United States continues to be the most troublesome aspect of the overall financial situation, as businesses and investors are largely reluctant to go through with deals. With the first parts of the "fiscal cliff" discussion secured, Washington will need to take steps to create more concrete road maps indicating where economic policies will head in the coming months, and risk managers need to stay in tune with these happenings to make the best decisions.

Corporate risk falls and rises
Bloomberg recently reported that U.S. corporate risk fell for two straight days last week, directly following a decision by lawmakers to temporarily increase the debt ceiling. Credit-default swaps fell as a result, indicating that businesses in the United States, as well as investors, might be taking the news from Washington well. 

According to the news provider, Eric Cantor, the current House Majority Leader, explained that the finance chamber approved a deal to avoid surpassing the current $16.4 trillion ceiling of debt. Many economists believe that if the United States were to breach this limit, another recession might be reached and companies will not be able to pay back outstanding loans and other debts as a result.

"Developments in Washington are very important in the weeks to come," said Edward Marrinan, a strategies for RBS Securities, in a telephone interview with Bloomberg. "The announcement today provided a tailwind in the markets in the afternoon sessions."

Finally, the source explained that a drop in credit-default swaps is typically an indication that corporations are beginning to become more confident in the economic situation.

Never faltering from bad information
Businesses that do not feel entirely comfortable with the processes associated with credit risk management should consider hiring a firm that specializes in the tasks. Economic and political uncertainty is expected to continue for the next few months, and poor credit risk management in these turbulent times can lead to serious financial losses, as well as hurt reputations.