Monday, June 11, 2007

Minsky vs. Ponzi (fg)

The IMF and the Bank for International Settlements jointly warned about the consequences of rising interest for the stability of the financial system, as credit-financed takeovers may come unstuck when interest rates go up. Merger activity both in the US and in Europe now totals over $1000bn respectively this year to date. The report said that only 12% of the financing volume is equity (compared to 50% during the 1990s) the remainder being credits.

The financial instability hypothesis by H.P. Minsky compromises recent market behaviour. Large investment trusts and hedgefunds make on the carry by borrowing short and investing long. Rising interest rates at the short end likely will worsen the ongoing financing of current investment projects. Perhaps it's Ponzi time?