Crisis awaits global banks as trillions come due


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.

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.”

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.

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.

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

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.

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.

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.

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.

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
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.

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.

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.

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.