Friday, October 10, 2008
Now with the credit crunch, various companies will face shortage of cash and may result in solvency issue. The possibilities of bankrupcy has increased. But this is not the end of it. Many of these firms had issued bonds and many buyers of these bonds also buy the CDS (credit default swap) from banks and financial institutions for hedging purpose. Now as banks and financial instituions are in deep dangers that trigger their clients' liquidity problems, it can cause the both the bankrupcy and the inability to honor all CDS which in turn trigger another wave of scare on the banking system. If they couple with the problems on Alt-A and credit card loans, a huge global recession can be expected.