Bond markets will face enormous supply

Apart from rolling over sovereign debt, it’s the banks that will have to tap the markets and the sums are staggering…

Global Banks Face $5 Trillion Credit Squeeze
Wednesday, 21 Jul 2010 08:43 AM
By: Dan Weil

Banks across the globe had to raise trillions of dollars in capital as a result of the financial crisis, and now the bill for that borrowing is coming due.

It’s not a pretty picture. Worldwide, banks must repay or roll over $5 trillion of debt to bondholders and other creditors through 2012, according to the Bank for International Settlements.

“There is a cliff we are racing toward — it’s huge,” Richard Barwell, an economist at Royal Bank of Scotland, told The New York Times.

“No one seems to be talking about it that much. (But) it’s of first-order importance for lending and output.”

Of the $5 trillion total, European banks owe $2.6 trillion, and U.S. banks $1.3 trillion.

The situation is more serious in Europe, not only because of the larger number, but also because the sovereign debt crisis is hitting Europe harder than the United States.

Banks that need to roll over their loans and bonds will be competing with their own governments, which also have huge borrowing needs. That could cause a widespread credit crunch, making it even more difficult for consumers and businesses to borrow.

European banks may face an added burden, as the stress tests they’re now undergoing could force them to raise still more capital.

“If it turns out that a bank, under certain assumptions, has too little capital, then it has to get more capital or reduce its balance sheet,” German Finance Minister Wolfgang Schaeuble told Deutschlandradio.