Apologies for the light posting in the last week. Frankly, there hasn't been a whole lot to comment on. But this ominous NYTimes report highlights an increasing worry for the global economic recovery:
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.
This has been a growing concern for some time now, and it frames Europe's economic policies in a different light than those worried about "invisible bond vigilantes" have done. The European policy mix -- sovereign bailouts + slashed government budgets -- has always had an eye on the European banking sector. If sovereigns defaulted on debt owed to banks, then the already-damaged European banking sector would likely collapse without massive government intervention. This would touch off another global financial crisis, perhaps worse than the 2007-2008 panic. By providing funds for governments to pay back their obligations to banks, European governments hope to avoid that scenario. It's a big concern:
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.
Banks roll over obligations all the time. In normal times, when there is no credit crunch, this does not represent a problem. But if credit markets seize up again banks will find it very hard to stay afloat. If the crunch is severe enough, it could have very adverse consequences for the global economy. So far there are few signs of that happening, but the next two or three years will be perilous.
In the best case scenario for 2010-2012, as I see it, many banks will have to roll over their obligations at higher interest rates than before. This dampens profits, but does not cause major liquidity or solvency problems. Banks will limit their lending because they will not have access to funds at the same low rates that they had previously, and this will hamper economic growth. Much of Europe will remain mired in recession or low growth for several years, but the extreme adverse event -- another financial crisis -- will be averted.
I think that's the best case scenario. Maybe not. There are a lot of moving pieces here, so it's hard to know how it will play out.