Bond insurer, economic woes to feed fresh credit turmoil

By Jane Baird

LONDON, June 24 (Reuters) - More credit turmoil is yet to come as further problems emerge, including a massive shift in risk from bond insurers to banks, and fresh macroeconomic risks, leading bankers and investors said on Tuesday.

Global stock and credit markets have suffered in June as sentiment has worsened, with the tone darkening this week as fresh worries about the financial system have emerged.

The FTSEurofirst 300 hit a three-month low on Tuesday, while the iTraxx Europe <ITRAC5EA=> credit derivatives index flirted with the 100-basis-point barrier for the first time since April.

"For most of the year we have seen a market contraction which is the result of over-leverage," Jan Pethick, Merrill Lynch's (MER.N: Quote, Profile, Research, Stock Buzz) chairman of debt capital markets for Europe, the Middle East and Africa, said at the Euromoney Global Borrowers and Investors Forum in London.

"Now we are in for another dose," he said, as risk held by the monoline insurers could fall back on the books of the banks.

Moody's Investors Service last week dished out multi-notch downgrades to MBIA Inc (MBI.N: Quote, Profile, Research, Stock Buzz) and Ambac Financial Group (ABK.N: Quote, Profile, Research, Stock Buzz), formerly rated triple-A.

Analysts have warned that the downgrades could set off fresh turmoil -- with some saying it could be worse than March's sell-off, when Bear Stearns neared collapse.

One of the main conduits for losses from the credit crisis has been on complex structures known as collateralised debt obligations (CDOs). Some firms, such as Merrill Lynch and UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz), built up big holdings of these structures and then had to take billions of dollars of writedowns on them.