Debt crisis: a $46 trillion problem comes sweeping in
|June 1st, 2012, 05:28 PM||#1 (permalink)|
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Debt crisis: a $46 trillion problem comes sweeping in
Just as you thought things couldn't get any worse, credit markets are about to be hit by a veritable tsunami of maturing corporate debt. Standard & Poor's estimates that companies in Europe, the US and the major Asian economies require a combination of refinancing and new money to fund growth over the next four years of between $43 trillion and $46 trillion. The wall of maturing debt is unprecedented, raising the prospect of further, extreme difficulties in credit markets.
With the eurozone debt crisis still at full throttle, the Chinese economy slowing fast and a still tepid US recovery, it's not clear that the banking system is in any position to deal with this incoming wave of demand.
As if the refinancing problem wasn't already challenging enough, into it all stumbles the European commissioner for internal markets, Michel Barnier, to prove the old saw that there is no mess quite so bad that official intervention won't make even worse.
A traditionalist French socialist by background, Mr Barnier positively revels in his job as the EU's top financial services regulator. In a recent interview, he said that he liked the term "shareholder spring" because it implied "a regulation spring, a rule making spring". Yes, indeed, Mr Barnier likes very much rules and regulations. He wants to regulate everything from pay to solvency. The financial crisis has given him a wide open canvass on which to paint.
After a crisis of the magnitude we've just seen, it's perfectly right and proper, and certainly very human, to want to take immediate steps to fix the system, so as to ensure that this kind of nonsense can never happen again. There is also something to be said for striking while the iron is hot. Leave things too long, and the political will to act melts away.
Even so, it's not clear that right now, with the crisis self evidently approaching some kind of fresh denouement, is the time to be buttressing the system against the once in a hundred year event of the present maelstrom. Nor in any case can the sort of extreme regulatory overkill we are seeing at the moment ever be seen as appropriate.
As far as I know, Mr Barnier is well intentioned enough. He wants to protect us all from the calamities of the past. But in attempting to regulate away all future risk, he also threatens to undermine growth and further reduce already wanting European competitiveness.
To be fair, it's not all Mr Barnier's fault. He's only part of a posse of international regulators riding furiously off in the wrong direction long after the horse has bolted. If even a fraction of the time spent on trying to protect us against a crisis that's already happened was devoted to finding a way out of it, then we might actually be getting somewhere. As it is, almost every part of the reform agenda is making matters worse, not better.
In its analysis of the refinancing challenge, S&P concedes that it might just about be possible for the banking system to cope with the wave of corporate debt maturities, assuming no further deepening of the eurozone crisis. But providing the $13 trillon to $16 trillion of new money to spur growth is going to be a much bigger ask, especially in Europe.
"Much will depend on the continued ability of banking system regulators to pilot a path through the minefield that lies ahead", S&P observes. Well that appears to be that, then. Abandon all hope, for at the moment these very same regulators seem to be blundering their way forward as if entirely unaware of what lies beneath their feet. Ever more onerous capital and liquidity requirements have steepened the refinancing challenge, even with highly supportive central bank funding on hand.
European banks, still grappling with high leverage and a worsening sovereign debt crisis, are particularly badly affected. Because of the escalating European banking crisis, they face intense pressure to meet new capital and liquidity requirements more quickly. With new equity virtually impossible to raise, this has only further exaggerated the de-leveraging problem. Enforced recapitalisation from governments which are themselves insolvent scarcely helps matters.
In the US, there is at least a highly developed corporate bond market to act as an alternative to bank funding. That's not the case in Europe, where to the contrary, the regulatory agenda seems determined to put as many obstacles in the way of a viable bond market as possible.
Standard & Poor's calculates that if corporate issuers in Europe were to tap the bond market for 50pc of their new funding requirements (up from 15pc historically), it would imply net new yearly issuance of $210bn to $260bn. In only two years in the last decade has net new European issuance exceeded $100bn.
You might think this a significant growth opportunity, but Mr Barnier's new solvency directive threatens to snuff that one out too, by requiring that only the most credit worthy and liquid bonds count for capital purposes.
The new solvency requirements virtually outlaw bundling together corporate loans and issuing them as asset backed securities, or rather, they prevent financial institutions from providing a viable source of demand for such bonds. Instead, finance is pushed by regulation ever more aggressively into sovereign bonds, even though many of them are now less than credit worthy.
The rules also threaten to stymie Government hopes of the private sector substituting for the public infrastructure spending being cut as part of the austerity drive. Many long dated infrastructure bonds don't meet the investment grade deemed necessary to qualify as a "safe" investments for insurers.
A more nonsensical piece of regulation is hard to imagine. Public investment in infrastructure is being cut almost everywhere to meet deficit reduction targets, leaving EU member states highly reliant on private sector funding for essential investment in the future.
Governments could of course do as the CBI suggests in a new report on infrastructure spending, and either guarantee the bonds or enhance their credit rating by entering into first loss agreements, but this is just off-balance sheet window dressing, where the private sector takes the upside, and taxpayers the downside. Governments might as well spend the money themselves.
Europe desperately needs growth, but it seems determined to stifle the credit needed to provide it. How stupid can you get?
Debt crisis: a $46 trillion problem comes sweeping in - Telegraph