AN INSIDER'S VIEW:It's still far too early in the cycle for a sustained recovery in financial share prices

WITH ALL that has been written to date regarding the dire consequences of the ongoing credit crunch, one would be forgiven for believing that the global capital markets had completely seized up. Of course nothing could be further from the truth and an example of this was the successful issue this week of a new benchmark bond by the National Treasury Management Agency.

The €7 billion bond was almost twice oversubscribed and was the largest syndicated transaction for four years in the euro-zone bond market. The bond was priced at 50 basis points over the 10-year German Bund, which matures almost one-and-a-half years earlier. The strong demand for the issue, and the reasonable yield premium over the German Bund, is an indication international investors remain confident in the overall resilience of the Irish economy.

Unfortunately, this does not mean that international investors are ready to alter their apparently negative view of the Irish equity market and of the banking sector in particular. All indicators point to further weakness in both Irish and British property markets. Estimates for new Irish house completions for 2008 now range between 40,000 and 50,000 units, with forecasts for 2009 settling about the 40,000 mark.

The ongoing very weak trend in the starts data will not significantly affect the 2008 outcome, given the time lags involved between starts and completions. However, if this current trend in starts persists for much longer, completions in 2009 could fall well below current forecasts.

Even though the rate of new house completions has fallen sharply, there remains a large overhang of excess supply on the market. Highly publicised price discounting of the order of 15 per cent to 20 per cent earlier this year resulted in increased sales for those builders that cut their prices. The key April-May selling season is now upon us and this will present an acid test of the strength of underlying demand at lower price levels.

The optimists will be hoping that improved affordability will entice first-time buyers back into the market. Croesus thinks that this is unlikely. The slower pace of economic growth is now beginning to feed through into a rise, albeit small, in unemployment. Even a modest deterioration in perceptions regarding job security can significantly weaken consumer confidence, particularly as it relates to major decisions such as house purchase.

A second factor that will weigh heavily on housing demand is the ongoing tightening in the availability of mortgage credit. Given the ongoing credit crunch, banks will continue to tighten their lending criteria. Furthermore, the cost of borrowing is unlikely to come down in the near term as it will be the second half of the year before the ECB even considers a reduction in its repo rate. On the contrary, elevated interest rates on the wholesale markets mean that banks will be trying to edge up the rates of interest that they charge on new loans. In this environment even further reductions in new home prices may not be enough to stimulate a large-scale uplift in demand.

Internationally, the minutes from the Fed's March meeting revealed participants felt a prolonged severe economic downturn could not be ruled out and that downside risks remained significant. US data on sales of previously-owned homes fell by 1.9 per cent in February and this was down 21.4 per cent compared with a year ago.

British housing data was also weak, with Halifax reporting a month-on-month fall of 2.5 per cent in house prices last month, the largest monthly decline since 1992.

Finally, on Tuesday, the International Monetary Fund (IMF) said that turmoil in the credit markets could spread, with losses approaching $1,000 billion. Its key concern was how credit conditions would fare in a US economic downturn and it stated: "The deterioration in credit has moved up and across the credit spectrum to prime residential and commercial mortgage markets, and to corporate credit markets. As the credit cycle turns, default rates are likely to rise across the board."

However, the IMF report indicates that US banks have now reported most of their estimated losses and European banks are rapidly catching up. Therefore, the only good news is that most of the bad news is now known and, presumably, reflected in the current level of share prices.

For the moment the best that can be hoped for is that the share prices of financial stocks hold on to the recent recovery from the levels experienced around the Bear Stearns collapse. It is still far too early in the cycle for a sustained recovery in financial share prices.