Rolling risk in America’s debtoconomy

(noon. – promoted by ek hornbeck)

  Moody’s released a report that would be headlines in the financial news media of any country that wasn’t in bed with Wall Street.

 The average maturities of new debt issuance by Moody’s-rated banks around the world fell from 7.2 years to 4.7 years over the last five years – the shortest average maturity on record.

 So how much is that in raw numbers? Banks will face $7 Trillion in maturing debt before the end of 2012, and $10 Trillion by the end of 2015.

  Those are staggering numbers, but it doesn’t end there.

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  When a bank’s portfolio is full of short-term maturities, it makes it more vulnerable to panics, crashes, and liquidity squeezes. If the debt maturity issues of today were true in the summer of 2008, the bailout would have been much sooner and much larger.

  When the debt matures it is likely that the banks will be looking to exchange the short-term debt for longer maturities, but that will come at a cost.

 funding costs would increase from the mere fact of moving out on the yield curve, with the risk of funding costs being pushed up further by the rising tide of benchmark rates.

 Which brings us back to the simple question of how easily the banks will be able to find enough investors to roll over the enormous amounts of debt saturating the system. Even Moody’s is skeptical.

 Investors have returned to the market in 2009, providing significant amounts of funds, but this should not be confused with a return to a normal operating environment. We believe that the “thawing” of debt and equity markets was largely driven by calculated, opportunistic risk-taking in the context of the extraordinary support provided by government programs and very low short-term interest rates. We would therefore not describe the investor resurrection as a return to strong financial fundamentals in the markets.

   In fact, we expect that credit-related losses to continue to cause damage to banks’ financials. In our view, losses are still on a rising trend, mainly because of the delay that exists between the end of a recession and a fall-off in provisions and actual charge-offs.

 Of course a lot of money has been printed by the central banks of the world recently, so its likely that the banks can scrounge up $7 Trillion in the next three years. The problem is that the banks aren’t the only ones that will need to be rolling over maturing debt.

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 About 40% of the $7 Trillion of marketable treasury securities matures in the next 12 months. That’s $3 Trillion of treasury debt by the end of 2010.

 In fact, with the coupon calendar currently in place, the average maturity of issuance now exceeds the average maturity of marketable debt outstanding. This suggests that the decline in the average maturity of debt outstanding that that we have witnessed over the past seven years – from a high of approximately 70 months in 2000 to a low of approximately 50 months earlier this year should be arrested and begin to slowly lengthen going forward.

   – “Report to the Secretary of the Treasury”, Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association, 5 August 2009

In the space of two years, the portion of America’s debt that matures within a year has jumped from 30% to 40%. Consider the possible problems.

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 Considers two scenarios if the US has a currency crisis, a solvency crisis, or some other financial stroke.

(1)  We’ve borrowed $14T, one year’s national income, but financed it all with 30 year bonds.  The interest bill would be large, at 6% equivalent to roughly 1/3 of the Federal government’s revenue.  But only 3% must be rolled over every year.  In a crisis we might lose the ability to borrow (painful), but the debt remains manageable.  Also increases in interest rates affect us slowly, as the 3% of the debt rolls over annually.

(2)  We’ve borrowed $14T financed with 1 year bonds.  The interest bill would be far less, but any crisis threatens the government’s solvency:   bankruptcy, hyperinflation, and revolution would be our choices.  Also, a rise in rates immediately increases the interest cost.  Even if we manage to roll the debt in a crisis, the rise in rates alone might prove catastrophic.

With an average maturity of only 49 months, and almost half due in the next year, we are far too close to the second scenario.

 Yet another area of the economy that will need to roll over massive amounts of debt in the coming few years is commercial real estate.

  Unlike the residential real estate industry, with its 15 to 30 year mortgages, the $6.5 Trillion commercial real estate market typically involves five to seven year mortgages. Fitch estimates that losses on commercial real estate will dramatically rise next year.

 There have already been attempts to roll over some European loans due for refinancing, with one investor summarising the position in an increasingly used phrase, “a rolling loan gathers no loss”.

 All told we are looking the American economy is looking at rolling over about $15 Trillion in debt in the next three years, more than the present GDP of America. That doesn’t include any new borrowing from the federal government, state and local governments, and the private sector.

Ultimately, it is also important to remember that these debts in the wider economy have an impact on other people too. With more and more companies struggling to pay off their debts, it seems that we are also seeing an increase in people declaring bankruptcy.
Declaring bankruptcy can be an overwhelming prospect to understand. If you are considering declaring bankruptcy or are interested to learn more about ways of regaining financial independence, you might want to contact a Bankruptcy Attorney in San Diego or closer to home for some legal advice.
 Above all though, with regards to the economy as a whole, it makes one wonder exactly where all this credit is going to come from, and when America becomes classified as a deadbeat?

11 comments

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    • gjohnsit on November 11, 2009 at 3:22 am
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    Because you can never have enough ponies.

    • Edger on November 11, 2009 at 3:43 am

    I was about to say I’m not sure what you said here but it wasn’t sounding good.

    Now it really doesn’t sound good.

    I guess it depends on who’s doing the classifying, and whether they hold any of the debt, no?

    But then if I owe you a few thousand and you rely on the cashflow and I can’t or don’t want to make payments, which of us has a problem?

    Until I need to borrow more, of course…

  1. US Treasuries, 10 cents on the dollar.

    Complete slavery for the next four to five American generations to pay this off.

    And they are still doing it, re-fi my house at up to 97

    % of it’s value.  Do they accept unemployment checks I wonder.

  2. didn’t really affect the cream of the crop though. Debt’s always worked out in the long run, just not real favorably for the peasants. Also, there’s no more resources to steal; well maybe not quite.

  3. are posting here more and more. Cool.  

    • banger on November 12, 2009 at 5:02 am

    The current line is that we are in recovery and the propaganda organs are talking up stock prices. Actually in today’s trading culture talking up stock prices is exactly what you do — that is, essentially, the bubble economy in action. Debt is largely irrelevant in this situation. As long as stocks go up the organs will keep playing a circus tune, “step right up…” And Americans are famous for its rubes. People will buy because they want to buy — fundamentals rarely enter into the calculus.

    The overconfidence exists because the system has always righted itself after every crisis or recession. But we have never had a weak economy and massive debt on this level. What we are likely to see is born out by what has happened recently in the markets. A falling dollar and rising stock prices and rising gold. Gold will have to stay strong because currencies (not just the dollar) are not as solid as they once were as a long-term investment which is why maturity dates are coming down so much.

    I believe we will see a recovery as predicted (in the land of self-fulfilling prophesies) and then we will get a quick crash in a year or two that will bring us back into what I believe is a inflationary recession. I think the government and the financial markets will work very hard to make it appear like it’s something different and prosperity is just around the corner but it ain’t happening and here’s some reason why:

    • Wages have not matched productivity growth and it never will again, therefore there can be no consumer-driven permanent recovery. Particularly with massive consumer debt
    • American society has become stagnant and is actively resisting innovation at all levels. The reason for this is that many people remain in jobs just to pay off a high mortgage, pay off debts (they had to borrow money in order to make up the gap in productivity and wages) and to an increasing degree, pay astonishingly high (by international standards) health-care costs. This discourages people from taking chances, starting new business, and even be innovative in the work place since (as has been my experience) innovation usually pisses of bosses who see change as a threat to their power.
    • The major institutions in this country have become corrupted to a degree that they are unable to reform. We are now, more or less, in a kleptocracy where the major institutions lack all sense of social morality — which in my lifetime is unprecedented — even Wall Street had many very responsible people in leadership positions (mind you I disagreed with them and they were bringing us into our current situation but many prided themselves on being ethical and looked down and socially excluded those that weren’t). Politics is utterly immune to change because the MSM is completely controlled by various faction in the oligarchy. There is no way you get anywhere in that world (MSM) unless you have been vetted into one crime family or the other. There is no way we can prosper economically if all major institutions in society are failing at the same time.

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