Lesson from Enron: How the Dominos Fall

Writing as someone who witnessed the Enron saga from *ahem* very close proximity, I learned an important lesson. Well several actually, but this one is to do with how the dominos fall, and the answer is – surprisingly slowly. Enron, the pre-eminent market-maker in the global energy sector, went under in October 2001. This brought down the vast and burgeoning ‘merchant energy’ sector, and after that the project finance sector; and at the time I assumed this would happen in weeks, if not days.

Not a bit of it: the big energy merchants crashed at the rather leisurely rate of one per month, until the final bankruptcy (TXU Europe) a full year after Enron. Project finance hit its nadir the year after that.

There isn’t space here to discuss why this happens in such slow motion. The point is that what we are currently seeing on the vastly greater theatre of world finance, indeed the global economy, needn’t be anything other than protracted agony. We can expect wave upon wave of Bad News, each time emanating from some new and unexpected quarter. IMHO, we’ve only just begun.

And today’s news ? Well, B&B of course, and Mervyn King’s pronouncement, and US student loans: but also this. Fitch, the ratings agency, has analysed US corporate debt (you can register free to get the report) and finds that over half a trillion dollars of bonds are scheduled to mature over the coming year. For the one-third of this that is speculative grade, where spreads have doubled or more over the past six months, “issuers will face substantially higher borrowing costs in 2008” – a bit like home-owners facing renewal of their previously low fixed-rate mortgages. Oh, and they calculate that bond rating downgrades are happening at more than 4 times that of upgrades – it’s 6 times greater downgrades for investment-grade debt.

Yup, we’ve only just begun. Happy Valentines !

ND