Boom-year debts could bust us
- 25 November 2011
- From the section Business
I've got some good news, and some bad news.
The good news is that if we get through 2012 without the financial collapse of a big bank or a eurozone government, our economy will probably muddle through, flatlining rather than falling back into acute recession.
The bad news is that 2012 is the year of greatest risk that a bloated bank or over-extended government will be unable to repay its debts - because it is a year when a frightening volume of the loans that were taken out in the boom years fall due for repayment.
In private equity, for example, much of the money that was borrowed to finance the buyouts of big companies from 2005-7 has to be paid back in the coming year.
In practice, it would mean replacing old debts with new debts - borrowing new money to repay existing creditors.
One specialist in this kind of finance told me that he has just been approached by a private-equity firm looking to refinance £2.5bn of maturing debt. His instinctive reaction: fat chance.
Why so gloomy?
Well capital markets are more-or-less closed for highly leveraged companies (businesses with big debts). And banks are strapped for capital and under orders from regulators not to take substantial new financial risks.
So goodness only knows how these big companies will find the cash they need.
Which may of course trigger losses for current lenders.
That said, the amount of debt maturing for private-equity owned companies pales into insignificance compared with the debts of banks that have to be repaid or refinanced in 2012.
European banks in general will need to find an estimated 810bn euros to repay loans that are falling due (according to research by Royal Bank of Scotland). Of this, British banks financing need will be around 110bn euros.
And then, of course, there is the bulge of European government debt that needs to be repaid.
So adding together maturing debt, new borrowing and interest payments, Italy will need to find 400bn euros, France a tiny a bit less, Spain around 220bn euros and the UK approximately 260bn euros (my calculations based on data from Bloomberg and the European Commission).
As I have pointed out before, Italy, France and Spain are more at risk of a funding crisis than the UK, because their central bank, the European Central Bank, will not buy their debts to any substantial extent.
There may be good reasons for the ECB's refusal to be the lender of last resort, not least of which is that any purchase of one nation's debt by the ECB represents a subsidy to that nation from the rest of the eurozone, without explicit or implicit permission being given by the electorates of the other sovereign states (see Tuesday's post, The eurozone's borrowing costs may stay lethally high, for more on this).
Or to put it another way, it's not completely bonkers that the German government does not wish to - in effect - finance the lifestyles of Italians and Spanish people, without checking whether German voters think that's tickety-boo.
But if Germany won't lend to its eurozone partners, who should?
Here's the thing: in a crisis the liabilities of banks and the liabilities of governments are broadly the same thing, as the poor beleaguered Irish government has found to its cost.
And, as I say, when you look simply at the 2012 refinancing needs of financially stressed eurozone states and banks, well it's a big number.
So if you happen to be a money manager in Boston or Abu Dhabi or Singapore, looking after billions of dollars of other people's money, and you can't identify a lender of last resort to interconnected eurozone states and eurozone banks - you can't see who is going to bail out the currency union if it all goes horribly wrong - you may well think that increasing or even maintaining your exposure to the eurozone is something of a sucker bet.
Which is one reason why eurozone governments and banks are finding it harder and more expensive to borrow - and why, with all those debts falling due in 2012, eurozone leaders haven't got long to agree a credible rescue package, if they're to skirt default, banking meltdowns and eurozone fracture.