The Bank for International Settlements warned in its 75th annual report that despite the flurry of events triggered by the General Motors and Ford Motor Co. corporate credit rating downgrades this spring, it remains to be seen how the credit default swap and CDO markets could handle a string of credit blow-ups or an abrupt turn in the credit cycle. Because the ratings downgrades of the auto giants were somewhat anticipated among investors, the rather "orderly fashion" in which the credit markets adjusted themselves post-ratings action "might not be a true reflection of how these markets would function under stress," according to the BIS.
The BIS released the 233-page report, which detailed a number of other economic concerns - such as the U.S. current account deficit and declining dollar, the thin margin between perceived safe and risky investments, and China's currency peg - a day prior to the G-8 Summit last week. The mention of CDOs and CDS in the report highlights the increased attention to the sector among regulatory agencies and in the headlines. Some market players are anticipating increased scrutiny as the investor base could further broaden to include more inexperienced buyers.