Markets in "eye of storm": FSA's Huertas

By Richard Barley and Elena Moya

LONDON (Reuters) - Financial markets may experience further turbulence that could last for a significant period and reduce demand for more complex credit instruments, a senior official at the UK Financial Services Authority said on Wednesday.

"I think 'eye of the storm' are some of the words that come to mind," Thomas Huertas, acting managing director of wholesale and institutional markets at the FSA, said at the Reuters Finance Summit in London when asked how far through the current crisis the markets were. "And hurricane forecasting is a difficult art," he added.

"In our discussions with the banks ... they are moving under the assumption that this could last for a significant period of time. I'm not making a forecast as to whether it will or won't."

Further turbulence could lead to more pain for banks and brokerages, some of whom, such as Citigroup (C.N: Quote, Profile, Research, Stock Buzz) and Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz), have announced larger-than-expected writedowns for holdings of structured finance securities.

"That depends on the way the market develops. If today the price of a security is 100, if it drops to 50 tomorrow, writedowns will be required," Huertas said.

He said the degree of stress experienced by banks had not been expected by anyone in the market or at the FSA.

"If we pick a date, say June 15, 2007, what was the likelihood on June 15, 2007, that we would say that the asset-backed securities market would have dried up for a period of 10 weeks? It was not considered to be very high."

CONSEQUENCES  Continued...