Rolling risk in America's debtoconomy

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

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Comments

Even with a change in administration

I'm about to jump out of my skin with the refusal of Congress to do their job instead of corporate lobbyists jobs and start rebuilding this economy with trade, economic incentives, jobs programs and frankly it looks strongly that our entire education system needs reform....seemingly administrators have picked up on the same tricks as executives and are seriously lining their pockets.

Glad to see this post, midtowng. You hadn't posted for a few days and I was worried we lost our best writer!

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Hence Marc Faber's target

Hence Marc Faber's target for the future value of the dollar: $0. Faber is given to melodramatics, but he has a point.

With Ambac threatening bankruptcy and Jim Chanos recommending going short municipal bonds we may be seeing the early signs of the real debt bubble collapse. Geithner and Bernanke have their fingers in the dike, but the water is lapping over the top. They're hoping to raise the height of the dike through inflation, but dollar revulsion may come first.

As a middle-aged saver, I see myself losing either way.

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"Debt Jubilee"

IMHO, Prof. Steve Keen has it right - debt and deflation. The question is what do we do? MASSIVE DEBT FORGIVENESS OF PRIVATE SECTOR DEBT - DEBT JUBILEE. Kill the parasites in the financial sector. Press re-set on financial sector and start over.

RebelCapitalist.com - Financial Information for the Rest of Us.

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We won't have debt forgiveness in the private sector

Sadly the train has left the station for debt forgiveness in the private sector. That needed to start en masse about a year ago, when our government was faced with a choice - bail out the people or bail out the very gangsters that caused the mess, and our government chose the banksters over the people.

Which is the moral hazard that undercurrents the whole situation. Not discussed as much, but it will be the moral implications of all this that will tear our nation apart in the years to come. When that time comes, no charts will be needed for the average American to understand what happened.

They'll understand that the situation midowng so ably presents was willful. It was the financial elites stubbornly refusing to let the people off the hook, when they could have done so. The people are the last ones in to a giant ponzi scheme. And our government willfully decided to pour whatever it can conjure into the top of ponzi scheme to keep it going.

The crisis is not economic, it's moral. Bernanke and co. are amoral men, Destroyers willing to sink a nation to protect it's elite. The people haven't figured it out yet in large numbers, but hopefully they will.

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I agree.

But our current state of purgatory will not change without some significant shifts in policy. Banks will not provide credit to businesses because they are insolvent but are being propped up by the Fed and Treasury.

RebelCapitalist.com - Financial Information for the Rest of Us.

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did you read that COP report?

I wrote up in a blog post. I was fairly surprised TARP is projected to turn a slight profit.

Frankly I think it's all ill gotten gains, but it could be worse, they could have lost that money.

It's really dense and that's because of the insane amount of programs out there, I concluded it was meant to baffle, so the report you must track each mnemonic to each program and then to the money outlays of it.

But, it appears Citigroup is a black hole which has fallen off of the public radar screen.

On the Economy, we need major structural change. Not only do we need major financial reforms, the entire economy, these policy makers refuse to deal with globalization.

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I don't believe that

I was fairly surprised TARP is projected to turn a slight profit.

The money that has been paid back has been from the solvent companies. The losses from loans to insolvent companies hasn't been booked yet. If you keep loaning a hopelessly bankrupt company money, then you never have to acknowledge that you've wasted the it.

It's just more wishful thinking as far as I'm concerned. They are sensitive to the public outrage, and this is just one way for them to deflect it.

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I have a heard time believing it too

But.....COP as well as SIGTARP have been trying very hard, so for them to explicitly state this, I have to give it some credibility.

I don't think they can buy or silence Elizabeth Warren.

In their report, they have a series of charts, spreadsheets which show the outlays vs. the revenues.

But! The black hole is Citigroup, with the largest amount of funds received.

So, if the losses aren't booked yet, I'm wondering why COP doesn't really point to it, but they sure do point to Citigroup and how information is not forthcoming.

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TARP 'almost certain' to bring loss

If it doesn't make sense, then chances are it is bullsh*t.

(Bloomberg) -- Neil Barofsky, the federal watchdog for the $700 billion financial industry bailout, said the program will “almost certainly” result in a loss to U.S. taxpayers.
“We need to temper or be realistic about our expectations,” he said today at the Bloomberg Washington Summit of the Troubled Asset Relief Program. “It’s almost certainly going to be a loss.”

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you're right midtowng

I managed to confuse myself (not good when I'm reading these reports and writing blog posts on them!) between the guarantees program vs. the "cash" TARP.

Fortunately the error is just in the comments and not the actual blog post and I also put up another one on TARP with the actual projected losses.

Currently the projected losses from the $700 Billion are $200 Billion.

But! While Citigroup passed the lastest stress test, it's really unclear exactly how and they have the largest amount of funds.

GMAC failed the stress tests. It's in the post on using TARP to "pay down" the deficit....but I don't understand how that works since the TARP itself is borrowed money.

Seems like some accounting trickery that I'm unsure hits the taxpayer more? Unclear.

Also, I'm seeing some noise about GS manipulating the oil commodities futures markets. On this post which is making the "links" rounds.

Also included are our main TARP recipients.

Finally, I find it very interesting that the derivatives market is basically controlled by these 4 major players AND we cannot get meaningful reforms.

Anywho, to be clear, the guarantees program is projected to come up with a slight profit, abet I frankly don't trust much coming from the OMB. Hopefully SIGTARP will weigh in on that.

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OMB report

I'm digging around more into it and finding CBO last report was in June, SIGTARP, 10/09.

But frankly I trust OMB like I trust Enron for giving objective data.

SIGTARP says we've lost $50B for the home program and odds are the auto companies won't be able to pay back their loans.

I believe the COP report is focused on guarantees, warrants, loans....

But unless I read something incorrectly that slight profit was total principle.

Still they based their report on OMB projections....

I wonder why they did that and not use the SIGTARP report.

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It's not a time for credit anyway

It's a time to deleverage.

The formula, in my view, would have been to let every major bank and casino house fold in 2008. Then take 1/2 of the Fed-gotten-goodies we produced out of thin air, and push that over to the base of the pyramid in the form of a social safety net, to deal with the depression that would have resulted.

At the same time do a society-wide revaluation of assets and commensurate consumer debt forgiveness.

Instead of that, we pour tens of trillions into the top of the pyramid, only to keep the old ponzi scheme going, while inventing brand new ones to get lost in. And then we just hand over the cash to boot, with no lending requirements.

You're right, we're stuck now. Banks won't lend and consumers won't borrow. But that won't change, it's too late for that now. All we have from now on is government gimmicks, bubbles, and an ocean of public and private debt, until the whole thing folds in on itself.

Ben belongs with Bernie.

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gatias

You might consider creating an account since you are commenting often.

I also have no idea what "Ben belongs with Bernie" means.

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Good tip

I should do that on the account, thanks for the tip.

"Ben belongs with Bernie" was rhetoric, a bit of hyperbole. As in Ben Bernanke belongs in the same jail cell with Bernie Madoff.

Obviously this isn't true in a literal sense. But for running a legal ponzi scheme 1,000 times larger than Bernie's illegal one, Ben belongs somewhere not as Chairman of the Federal Reserve.

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Personally I don't blame Ben so much

I blame Greenspan and then I blame the structure of the Federal Reserve itself.

I wrote up a 1st pass review of Dobbs bill and he has some structural changes but separating the Federal Reserve from commercial/financial banking industry to me is critical.

About the only thing I can blame Ben for in all seriousness is the stonewalling on who received the $2 trillion dollars.

I blame Hank Paulson much more.

I'll look for your account info. (each must be approved).

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Doom and Gloom

Midtowng,
You are one of those ‘doom and gloom’ negative guys that Bonddad and New Deal Democrat are always talking about. Wake up and smell the ‘green shoots!’ is what they say.

Tongue in Cheek of course.

Seriously, what I’m wondering (just wondering) if there are two variables that if factored in may mitigate if not solve the debt problem: (1) massive inflation via Central Banks (plural) operations and (2) the massive wealth of Gulf States that have a vested interest in keeping the US a super military power which entail keeping the US economy healthy. Gulf states may have enough money to cover a significant portion of the debt as it comes due –just a thought.

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Bank Failures

A quote from James Fuchs & Timothy Bosch of the St. Louis Fed in a paper on on "Why Are Banks Failing?"

“Although today's challenges are great, the four underlying reasons for bank failures have not changed from those of years' past, which are:
 an imbalance of risk versus return
 failure to diversify
 offering products and services that management doesn't fully understand
 poor management of risks"

Is there any incentive to correct their mistakes? Will Uncle Ben always be there to bail them out?
Frank T.

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Frank T.

The word you are looking for

The word you are looking for is Chreosonomy.

"Rolling risk in America's Chreosonomy"

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