Bankers in London are warning of the worst crisis in global money markets in 20 years as more than $110 billion worth of Commercial Paper is set to mature this week, according to the London Times.
CP is short-term debt maturing in 270 days or less, used by corporations primarily to finance inventory or manage working capital. Almost 20% of the short-term money market loans issued by European banks are due to mature between September 11 and September 19.
The inability of much of this paper to mature and be re-sold will force the world's major banks to assume the liabilities onto their balance sheets, the Times says. That has the net effect of removing from availablity cash that banks would have used to make loans.
Why is this happening? According to the Times, many of the off-balance-sheet structured investment vehicles (SIVs) set up by the banks were borrowed in the form of asset-backed commercial paper (ABCP). And this accounts for a large portion, almost half, of the CP rollovers.
ABCP is a form of senior secured, short-term, low-cost borrowing available to companies that could not otherwise directly borrow in the commercial paper markets.
The bottom line is that the banks are now hoarding cash and have stopped lending to each other. This has created a liquidity freeze. Or, as Paul Mortimer-Lee, global head of market economics at BNP Paribas in London puts it for the Times, “It is both a liquidity and a capital crisis.”
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