Economist and head of Queen’s College at Cambridge University, Mohamed El-Erian, said that the potential evaporation of liquidity poses significant risks to global markets and economies, amid indications that capital is becoming more expensive and difficult to obtain.
El-Erian added, “The only risk I am concerned about is liquidity risk. We are starting to see a decline in the liquidity of the markets.”
Al-Erian pointed out that the companies’ issuance of financial products was very weak last June, explaining that the companies were unwilling or unable to refinance themselves, according to what was reported by Bloomberg Agency and seen by Al Arabiya.net.
Last June, the high-yield US bond market witnessed a jump in yields and spreads to their highest level in two years in the largest monthly loss since the beginning of the epidemic in March 2020, and volatility and the high cost of debt drove borrowers away from the market.
Junk bond issuance in the United States fell to $25 billion in the second quarter of this year, the lowest level since 2006.
The Federal Reserve has raised interest rates three times since the start of 2022, and has promised more increases this year to stem the hottest inflation since the 1980s.
“It is possible that the central bank will stick to its plan, which will slow the economy, increase the possibility of a recession, and increase the difficulties that companies may face in obtaining financing,” El-Erian said.
Financial assets around the world have been hit this year as central banks tighten policy to deal with rising prices for goods and services. El-Erian sees a “sequential movement” in the markets from inflation and interest rate risks earlier this year, to credit risk recently and then to potential liquidity risk in the future.