What role did Monolines play in the latest Stock Market falls?

The Financial markets remain in a very nervous state. On Thursday we saw another sharp fall in stock markets right across the World. One factor behind this latest loss of confidence was the realisation that the "credit crunch" was having a severe impact on the World's biggest insurers of bond issues. The financial institutions involved are called "Monolines" who use their high credit ratings to provide insurance on debt issues by relatively risky borrowers. As a result a borrower rated at just a single A might be able to issue some bonds rated at triple A. The advantage to the borrower is that they will save an enormous amount of interest on their bond issues.

The great fear for some time has been that the Monolines themselves could see their own credit ratings downgraded. On Thursday this was confirmed with the news that Moody's Investors' Service indicated that two of the most important Monolines might lose their triple A rating. If this top rating goes there will be an immediate knock-on effect with the ratings of billions of other bonds being downgraded. Put simply, these bonds only have their high ratings because they are insured by one of the Monolines. If the Monolines lose their triple A rating there will be an immediate downgrading for the bonds that they insure. This could have a very serious impact on the banking sector right across the World. The banks will be forced to find additional capital to back the bonds that they hold.

Against this background it is not surprising that the World's financial markets are in a nervous state. It is clear that the impact of the "credit crisis" will continue to undermine confidence in financial markets for some time ahead.