The US Federal Reserve's decision to cut its borrowing rates was the "appropriate response" to investor fears that the fallout from the sub-prime crisis was running right through the US credit system, which drives its economy, according to one leading Dublin fund manager.
But Chris Johns, head of global strategy at Bank of Ireland Asset Management (BIAM), said further cuts were needed to stop the US sinking into a credit slowdown that could take years to reverse. He argued that the European Central Bank (ECB) needs to take a similar step.
Problems at an obscure insurance company sparked the latest round of stock market volatility, he said.
Ambac, a company that underwrites bonds issued by banks, is at the centre of the turmoil. Banks insure the bonds they issue to raise loans from other institutions with the likes of Ambac. This guarantees the bonds and underpins their value.
But independent agency, Fitch, recently reassessed Ambac's ability to pay its debts and reduced its credit rating. This means that Fitch believes there is an increased risk that Ambac will not be able to meet its liabilities.
Fitch's action led to the $2.5 trillion worth of bonds that it has insured also getting re-rated, cutting their value. The banks either have to sell them, flooding the market, or write off the loss in their value against their balance sheets.
Mr Johns pointed out that problem is tied into the sub-prime mortgage crisis that hit the US and world financial markets last summer and has since undermined investor confidence generally in the US economy. "That is scaring people to death," he said.
Eugene Kiernan, head of multi-manager investing at AIB Asset Management (AIBIM), agreed that the problems are ultimately rooted in the US credit crisis.
But he also argued that we could be about to identify where the problems will end. "Around half the S&P 500 companies will be reporting over the next few weeks, and we are going to learn a lot more then," he said yesterday.
At the same time, he pointed out that movement in the markets in the wake of yesterday's Fed rate cut indicated that investors believed there were opportunities out there worth exploiting.
Irish pension funds, meanwhile, are nursing losses of up to 10 per cent so far this year on top of a 4 per cent cent loss in 2007, according to Tom Geraghty, worldwide partner and head of investment consulting at Mercer. He estimated the volatility of recent weeks has knocked around €10 billion off the value of Irish pension funds but warns that, in the current environment, fund managers should avoid making hasty investment decisions.
