Markets braced for credit turmoil aftershock

By Mike Dolan

LONDON (Reuters) - After six weeks of calm, global financial markets are bracing for one more aftershock from the 9-month old credit crunch.

While the worst of the financial storm may well be over, the quarterly accounting scramble at banks and brokerages that has defined the crisis to date means it is probably wise to fasten your seatbelts again for the next four weeks or so.

For sure, the end of the second quarter is likely to be a quieter echo of prior crisis peaks of September, December and March -- marked in turn by the collapse of Northern Rock; a dramatic intervention by the world's big central banks; and the demise of investment firm Bear Stearns.

U.S. and UK central banks have opened up more critical cash support lines for banks and securities firms, major banks have already set about recapitalising with gusto and bond and loan markets have recovered significant ground.

But for those who profited handsomely from the recent market recovery -- where world stocks have bounced more than 10 percent since late March and corporate debt insurance costs have almost halved -- it may not be worth tempting fate.

"We are expecting to see a gradual increase in risk aversion coupled with wider spreads and rising volatility," said Meyrick Chapman, strategist at UBS in London, adding that June 18 is the next critical date in the financial calendar.

"We probably won't see the same disruption as we saw in March, given the central bank action in the meantime, but we will see some reversal."

UBS stresses the seasonal threat now central to the credit squeeze -- where sudden illiquidity of mortgage-backed bonds last summer coupled with banks' quarterly need to book those assets at market prices has forced huge debt writedowns and prompted solvency fears that paralysed interbank lending.