Almost 20 per cent of the short-term money market loans issued by European banks are due to mature between September 11 and September 19.
If the bank can’t roll over the loans and find buyers – and it’s almost a given they won’t be able to – then they have to finance the loans themselves, tying up tens of billions of their own money. They’ve been preparing for this by hoarding cash and making very few loans.
The major problem is, no one knows yet if the borrowers who issued the commercial paper have exposure to subprime, and no one wants to lend money until they know for sure. Thus, London lending is locked down and small businesses are already suffering because of this.
Along with this comes the increasing problems with structured investment vehicles. SIVs borrow money at short-term lower rates and invest it, highly leveraged, in higher yielding long-term instruments. The snag is, they need to refinance the short term debt, and given the frozen lending markets, that may not be possible.
The coming U.S. hard landing
On top of a weakening of the real economy the current financial markets turmoil will get worse â€“ not better – in the next few months. This was never just a sub-prime problem as the same reckless and toxic lending practices in sub-prime â€“ no down-payment, no verification of income and assets, interest rate only mortgages, negative amortization, teaser rates â€“ were occurring in near prime mortgages, Alt-A loans, piggyback loans, home equity loans, and prime hybrid ARMs. About 50% of all mortgage origination in the last two years was made of this toxic waste and utterly junk lending practices.