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Rolling over debt -- What kind of problem is it?



July 12, 2010 – Comments (2)

Here's an article about the gross level of bank debt and the need to roll it over at the same time governments around the world are looking to roll over debt.

One of my conclusions when I got out of the stock market is that interest rates would eventually have to go up as the price of risk was re-established into lending rates.  You had massive government intervention to assume the risk from debt that would have otherwise been defaulted on, so that hasn't happened.  You also had massive government spending at unsustainable levels by governments around the world to try and prop up the economy and now the need to control spending is being recognized so how reduced government spending will now play out remains to be seen.

But now there is not only bank debt, there is also more government debt all to be rolled over.  So, who holds that debt and how much will be rolled over by the debt holders?  You have to put your money somewhere and just rolling it over is as good a strategy as any in likelihood to a number of investors, so if the debt is already being held, where does the competition that will push the rates up come from?

Thinking the above article through at first made me wonder how rolling debt over when there are currently people who hold that debt and will be looking for some place to put their money would raise rates.  But then,governments are still borrowing huge amounts of new money.  Indeed, with the credit contraction, governments are probably the main player in the market borrowing new money, and the source of competition for rolling over bonds.  I personally still have more trust in a government printing press then banking insurance in terms of the risk of taking on either of these debts.

Here are some highlights from the article:

The 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.

This is enormous for the US because the US gives out these 30-year mortgages at rates with nothing in them for risk and funds it with short term money.  It is the biggest difference between the Canadian and American banking system, one that leaves the US at much greater risk from its banking system then Canada.  It seems the US has transferred this risk to tax payers through Freddie and Fannie, which spreads the costs to everyone rather then the people responsible for the bad decisions.  I am not completely sure the whole proces, just that short term money is being loaned long term without charging an adequate premium to pay for that risk.  Imho the banks that found themselves in trouble should have been required to fail before getting central bank support.  The banking executives ought to have been tossed and the banks ought to have been completely restructured, but that's another topic.

Jean-François Tremblay, a Moody’s vice president who has studied the refinancing issue, said that so far banks had managed to roll over debt better than expected. They have increased customer deposits, drawn on cash from central banks, or simply reduced their lending and their need for new financing — which is exactly what some economists feared.

 So, reduced lending is credit contraction, which is deflationary.


Even if there is no market meltdown, banks still face a transition to a period of higher interest rates that will weigh on profits.

The cost of borrowing is likely to rise faster than banks can pass it on to customers, analysts say.

It isn't unreasonable to have an expectation of rising rates when rates are pretty much at the bottom.

Anyway, there still are many wildcards in how it plays out. 


2 Comments – Post Your Own

#1) On July 12, 2010 at 3:40 PM, davejh23 (< 20) wrote:

Six Giant Banks Made $51 Billion Last Year; The Other 980 Lost Money

"Focus hard on this shocking Wall Street reality: The top six bank holding companies earned an aggregate of $51 billion in pretax income in 2009. We're talking about JPMorgan Chase, Goldman Sachs, Bank of America, Morgan Stanley, Citigroup and Wells Fargo.

All of this pretax income can be attributed to their trading revenues of $59.7 billion. The proprietary trading operations of an oligopoly of banks, saved from disaster by Uncle Sam's largesse and subsidized with cheap money from the central bank, was the single driving force behind the restoration of their fortunes and the renewed surge in their stock prices."

Trading profits drove 100% of TBTF bank profits last year...based on the above, 100% of ALL bank profits.  I've been very suprised that we haven't seen more bank failures in the first half of this year (not suprised that the media stopped reporting failures)...the pace is actually slower than the pace in the second half of 2009.  Late last year, the FDIC announced that they were doubling staff in order to deal with the "possibility" of an increase in bank failures going forward.  Based on last year's pace and the staff increases, I was guessing that we'd see 500 failures in 2010...that seems impossible now.  I don't believe that the FDIC made this move "just in case"...they know what's coming.  The financial system is still broken.

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#2) On July 12, 2010 at 4:06 PM, dwot (29.24) wrote:

Here's another report worthy of reading, Debt is still the major problem.

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