(BQ) Part 2 book "Global financial systems - Stability and risk" has contents: Credit markets, currency markets, currency crisis models, financial regulations, dangerous financial instruments, ongoing developments in financial regulation,.and othedr contents. | 10 Credit markets The most important financial products are fixed income assets, composed of various credit instruments, like bonds, structured credit products and credit derivatives. The reason is that credit is an absolute necessity for the modern economy, allowing people to save for retirement and get mortgages, governments to finance their operations and stimulate the economy in recessions, and private companies to finance operations and expansions. Of the fixed income assets, the most important are bonds. Financial institutions, corporations and governments depend on bonds for financing, and any problems in accessing the bond markets can quickly cause significant difficulties. That means the bond markets exert significant power over borrowers. Perhaps the best expression of their power was by a Bill Clinton strategist, James Carville, who said that he wanted to be reborn as the bond market because it is the most powerful force in the universe. Currently, some European governments are facing the wrath of the bond markets. Investors in fixed income markets are often faced with borrowers of an unknown quality and need some mechanisms to ascertain the credit quality, and monitor borrower performance. The most common way to achieve this is by using credit ratings issued by credit rating agencies (CRAs). These are private companies whose business it is to report on credit quality. Trying to forecast credit risk is difficult in the best of times and the CRAs have been under almost constant criticism for the quality of ratings and the impact downgrades have on borrowers. As a result, there are frequent calls for reforms of the credit rating business, but it is not obvious how that could be accomplished. Chapter 10 Credit markets We can also use various types of mathematical credit models to forecast credit risk. Of these credit models, the so-called reduced form models are particularly useful when it comes to mapping between the probability of default and credit
