Tags: credit | crunch

Credit Crunch Over? Don't Bet On It

Thursday, 04 Sep 2008 08:42 AM

The credit crunch which has dragged on for over a year now, may still be in its infancy.

Starting next month, banks in the United States and Europe must begin paying off hundreds of billions of dollars they owe by selling assets and issuing expensive new debt.

"The gears of capitalism are grinding to a halt," Mirko Mikelic, senior bond fund analyst for Fifth Third Asset Management, told Bloomberg.

"There is a tremendous concern over the banking sector and a scramble right now for capital."

The flood of debts now coming due are the result of a boom in short-term bond issuance between 2005 and the first half of 2007 that led banks to take advantage of some of the lowest borrowing costs on record.

The banks' debts, structured as floating-rate notes, will come due over the next year or so, just as banks beleaguered by subprime problems are trying to raise fresh capital in order to stay afloat.

By the end of this year, big banks and investment banks like Goldman Sachs, Merrill Lynch, Morgan Stanley, Wachovia, and U.K. lender HBOS must each pay off more than $5 billion in floating rate notes, according to a recent report from JPMorgan Chase.

The problem doesn't end there.

Big lenders like General Electric, Wells Fargo, and Italy's UniCredit Group also face bills coming due in coming months, the report says.

JPMorgan analyst Alex Roever says financial institutions will have to pay off at least $787 billion in floating-rate notes and other medium-term obligations before the end of 2009.

That's about 43 percent more than they had to redeem in the previous 16 months, the Wall Street Journal reports.

Bank representatives say they're fully able to meet their obligations, either because they've already accumulated the funds needed to do so or because they have ample customer deposits they can tap.

But, the rates they'll have to pay if they want to issue new debt will be much higher than they were two years ago.

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The credit crunch which has dragged on for over a year now, may still be in its infancy. Starting next month, banks in the United States and Europe must begin paying off hundreds of billions of dollars they owe by selling assets and issuing expensive new debt."The gears of...
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2008-42-04
Thursday, 04 Sep 2008 08:42 AM
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