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September 10, 2007

Money markets crisis looms

by Gill Montia

Story link: Money markets crisis looms

Some City analysts are warning that this week, the money markets could experience the worst crisis for 20 years.

According to Lehman Brother, the investment bank, $113 billion of commercial paper (effectively money market IOUs) are due for refinancing in the coming days.

This refinancing will mainly come through London and exceeds the $100 billion that became due in mid-August and caused market interest rates to rise steeply.

The large amount of commercial paper in need of refinancing in September is connected to the US American sub-prime mortgage crisis, as Structured investment vehicles set up by the banks to fund sub-prime borrowing in the US take the form of asset-backed commercial paper.

In the event that this week’s refinancing is largely successful, banks may still be forced to transfer some of the debt onto their balance sheets.

With this in mind, banks are conserving cash and have stopped lending to each other, resulting in a situation that could create both a liquidity and a capital crisis in the banking sector.

Last week, the Bank of England promised to provide up to £4.4 billion of extra liquidity to the markets and the European Central Bank and Federal Reserve have already released tens of billions of euros and dollars in an effort to steady the financial markets.

 

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