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.
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.
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
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 private sector.
It makes one wonder exactly where all this credit is going to come from, and when America becomes classified as a deadbeat?