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The impact of bond insurance

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Scott Jagow: For a second straight day, the world’s stock markets are being shaken to their core. In India, trading was halted after the main stock index plunged 10 percent within minutes of opening. Hong Kong shares finished the day almost 9 percent lower. In Tokyo, the Nikkei had its worse day since 9/11. It lost almost 6 percent of its value.

Let’s bring in Andrew Wood of The Financial Times. He’s based in Hong Kong. Andrew, obviously there’s a lot of distress about the U.S. economy. But is there something more specific driving this huge sell-off in Asia?

Andrew Wood: Well, there’s been a few things. For a start, there’s a lot of skepticism in the markets that President Bush’s economic stimulus package will be enough to avert a recession. Also over the weekend, there was news from Amac, which is one of the big bond insurers, that it had lost its top-notch credit rating from Fitch, and so that’s starting to make people worry. You know, the people who are insuring bonds against default, there’s a slightly bigger chance that they themselves might default, then that’s going to worry people all around the region.

Jagow: On the bond insurance issue, how bad could this be if the situation becomes worse? What’s the scope we’re looking at here?

Wood: The estimates I’ve seen suggest that there’s around about $2 trillion worth of bonds around the world that are insured by people like Amac. Now of course, the chances of all of those bonds defaulting at once and so the insurance companies having to pay out is, you know, pretty small — it’s a bit like, you know, every house in a town all burning down at once. But it’s worrying then perhaps if a few more default, then there might not be the people there to basically pay out those insurance payments.

Jagow: And what would that mean for the markets?

Wood: Well, you know, you can insure against all sort of things, except for the system itself collapsing. That is a very, very extreme case. But it certainly enough to make people want to get out of risky investments, put their money into on deposit, and then there’s this flight to quality. I mean, you’re seeing at the moment that U.S. Treasury bonds have risen quite sharply as people have been putting their money into them.

Jagow: Andrew, what’s your sense in terms of what it’s going to take here in the short term to stabilize the markets?

Wood: I think some good news coming out of America, for a start. I mean so far, a lot of the economic news we’ve seen — like retail sales last week, Intel missing its sales targets and so on — you know, these are all bits of bad news. So at the moment, we need some more good news, there might some more good news around economically, but until that comes along, I don’t think it’s going to have much affect on the markets.

Jagow: All right, Andrew Wood at The Financial Times in Hong Kong. Thank you.

Wood: Thank you.

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