Jupiter income guru Tony Nutt says the current credit crunch is far worse than the 1998 liquidity crisis.
The widely respected fund manager considers that too little remains known about how much exposure banks have to sub-prime mortgage lending and related debt instruments and he is concerned that more may need bailing out.
He points to the example of German bank Sachsen LB, which told the market that it had “significant liquidity” following the problems with lender IKB, only to need bailing out days later.
The 1998 debt crisis triggered the near collapse of massive hedge fund Long Term Capital Management, bringing a $4bn bailout by the US government.
He says: “On that occasion, the banks got together and unwound the position over a short period. This time, the market is so silted up in terms of credit that there are no quick answers.
“There is some $400bn of issuance out there, $700m of which is sub-prime. The one good thing is these debts are in the short term.”
Nutt says that it will be a short-term problem for equities as he expects a rally in late October but for bonds it will be a different story.
He says: “I think that bonds are difficult to call and people will still be talking about these issues in 12 months.”