Sunday, July 11, 2010

Crisis Awaits World’s Banks as Trillions Come Due

FRANKFURT — The sovereign debt crisis would seem to create worry enough for European banks, but there is another gathering threat that has not garnered as much notice: the trillions of dollars in short-term borrowing that institutions around the world must repay or roll over in the next two years.

The European Central Bank, the Bank of England and the International Monetary Fund have all recently warned of a looming crunch, especially in Europe, where banks have enough trouble raising money as it is.

Their concern is that banks hungry for refinancing will compete with governments — which also must roll over huge sums — for the bond market’s favor. As a result, credit for business and consumers could become more costly and scarce, with unpleasant consequences for economic growth.

“There is a cliff we are racing toward — it’s huge,” said Richard Barwell, an economist at Royal Bank of Scotland and formerly a senior economist at the Bank of England, Britain’s central bank. “No one seems to be talking about it that much.” But, he added, “it’s of first-order importance for lending and output.”

Banks worldwide owe nearly $5 trillion to bondholders and other creditors that will come due through 2012, according to estimates by the Bank for International Settlements. About $2.6 trillion of the liabilities are in Europe.

U.S. banks must refinance about $1.3 trillion through 2012. While that sum is nothing to scoff at, analysts seem most concerned about Europe because the banking system there is already weighed down by the sovereign debt crisis.

How banks will come up with the money is an open question. With investors worried about government over-indebtedness in Greece, Spain, Ireland and other parts of Europe, many banks have been reluctant or unable to sell bonds, which they typically use to raise money that they lend on to businesses and households.

The financing crunch has its origins in a worldwide trend for banks to borrow money for shorter periods.

The practice of short-term borrowing and long-term lending contributed to the near-collapse of the world financial system in late 2008 when short-term financing dried up. Banks suddenly found themselves starved for cash, and some would have collapsed without central bank support.

Government bank guarantees extended in response to the crisis also inadvertently encouraged short-term lending. The guarantees were typically only for several years, and banks issued bonds to match.

Other banks took advantage of the gap between short-term and long-term rates, borrowing cheaply from money markets or central banks and lending to their customers at higher, long-term rates.

A study in November by Moody’s Investors Service found that new bond issues by banks during the past five years matured in an average of 4.7 years — the shortest average in 30 years.

Since then, worries about Greek and Spanish debt and whether Europe is headed for another recession have caused new problems. Investors are unsure which institutions are in good shape and which are sitting on piles of bad loans and potentially tainted government bonds.

Bond issuance by financial institutions in Europe plunged to $10.7 billion in May, compared with $106 billion in January and $95 billion in May 2009, according to Dealogic, a data provider. New issues have recovered somewhat since, to $42 billion in June and $19 billion so far in July.

Bank stress tests being conducted by European regulators could help if they succeed in convincing markets that most banks are healthy. Bank regulators plan to release results of the tests, covering 91 large banks, on July 23.

Sandeep Agarwal, head of financial institutions debt capital markets in Europe at Credit Suisse, predicted that the market could be separated into haves and have-nots, with the healthy banks raising money fairly easily but weaker banks required to pay a premium. “There is cash at the right price for many institutions, not all institutions,” Mr. Agarwal said.

That could add pressure on the weakest banks to merge, seek government help, or scale back their activities. Some might even fold. The Landesbanks in Germany, savings banks in Spain or other institutions that have struggled may be forced to confront difficult choices.

A shortage of bank finance also could create quandaries for the European Central Bank, which appears anxious to wean banks from the cheap cash that it began providing in the heat of the global financial crisis.

If institutions are unable to raise the money that they need on the open market, the European Central Bank would have to decide whether to continue to prop them up.

“Banks that have trouble tapping new funding sources will have to shrink,” the Bank for International Settlements said in its annual report in late June. The institution, based in Basel, Switzerland, brings together the world’s main central banks.

Stephen G. Cecchetti, head of the monetary and economic department at the institution, called the refinancing issue “a vulnerability and something to be watched.” But, he added, in a telephone interview, “I am confident that national authorities will take the necessary actions so that it isn’t a problem.”

Banks insist that they enjoy the trust of the markets and will be able to raise the cash they need.

“We’re in a comfortable position,” said Horst Bertram, head of investor relations at Bayerische Landesbank, Germany’s largest Landesbank, which is owned by the state of Bavaria and local savings banks. He said that as a result of government backing and a radical restructuring last year, the bank had ample cash and limited need for new financing.

Commerzbank, partly owned by the German government after a bailout, said its liquidity was well within regulatory limits. Commerzbank “can refinance at any time at market conditions,” the bank said.

Even if there is no market meltdown, banks still face a transition to a period of higher interest rates that will weigh on profits.

The cost of borrowing is likely to rise faster than banks can pass it on to customers, analysts say.

Jean-François Tremblay, a Moody’s vice president who has studied the refinancing issue, said that so far banks had managed to roll over debt better than expected. They have increased customer deposits, drawn on cash from central banks, or simply reduced their lending and their need for new financing — which is exactly what some economists feared.

The Bank of England estimates that British banks will need to issue £25 billion in bonds every month to meet their refinancing needs, which the central bank puts at £800 billion, or $1.2 trillion. That means banks will have to sell new bonds at double the rate they have been issuing so far this year.

“There is a risk that banks alleviate their own funding pressures by further constraining credit conditions for customers,” the Bank of England said last month in its Financial Stability Report. “That would dent economic recovery and so raise credit risk for all banks.”

1 comment:

  1. Sirs:
    If we are to continue buying bonds, we need to continue the marketing of things. Business must survive and be successful! Successful healthy business will continue to expand our economics and allow the dollar flow, creating more dollars, thereby in support for the buying of more bonds as more liquidity will be created, the basis of economics.
    If I buy gold, I stagnate some of my liquidity for security, thereby slowing my local economy. That security is at the economic expense of another, spawned by my mistrust in the weakness of our economy. If I buy silicon photovoltaic’s and install them, the value of my possessions increase, in real estate value, in relation to the value of those photovoltaic’s. Therefore photovoltaic’s are similar to gold except that the PV-commodity produces non imported-non environmental impacting energy AND work creating, installing and maintaining that product. Albeit, gold feels great and may go up in value, but photovoltaic’s pay as you go. The price difference associated with the higher cost energy from PV’s are a personal rational which I need to be accept if I live in a state without an energy buyback or subsidy. As buying a $100K electric sports car or a vacation, my personal satisfaction or “utility gain” from buying gold versus PV’s might need my personal evaluation for such expenditure, which ever I choose. If I grow and rise above my want for a frivolous need and associate that personal attitude in my local community we adopt what the Germans are accomplishing. Although as an American adult supportive economic adjustment version I might reinforce other's to move the economy in a more positive direction for our children by investing in PVs. Unfortunately, at this time the working class tends to be slightly less able to afford photovoltaics as daring to extend their credit. The wealthy, like all voters are as human as working class and prone to a peer status quo. If I am wealthy I will say I am either extended as that which is always popular to say or I really am extended, being management and/or wealthy no one except my closest friends will and should know. Observing that which is owned locally will accomplish understanding. Practicing a focus upon my locality I learn the business locally. I might choose to associate the thoughts of Thomas Jefferson, his idea of America and her need to revolt every twenty years. He meant a peaceful social revolt, a group freedom to be different and heard. Therefore, I should sell my gold and put solar on my roof. I should sell my gold to Jeff Beck. I might steadfastly align myself with economic consumerism geared toward my superiors to proper consumerism toward PVs. Else coerce other local wealthy to go and buy a $100K electric sports car. Doing the right thing? Maybe, setting the dollar in motion is excellent. Although, solar is better and with less utility though, as we are children who care to feel good. TV anyone, Jeff's on?
    ChangeItOrDrownIt

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