Britain's biggest banks could be forced to cough up as much as £70bn over the next 10 days, as the credit crisis that has seized the global financial system sparks a fresh wave of chaos.
Almost 20 per cent of the short-term money market loans issued by European banks are due to mature between September 11 and September 19. Senior bankers fear that they will have to refinance almost all of these debts with funds from their own coffers, putting a further strain on bank balance sheets.
Tens of billions of pounds of these commercial paper loans have already built up in the financial system, because fear-ridden investors no longer want to buy them. Roughly £23bn of these loans expire on September 17 alone.
Fears of this impending call on bank credit lines are the true reason that lending between banks has ground to a halt, according to senior money market sources.
Banks have been stockpiling cash in preparation for this "double rollover" week, which sees quarterly loans expire alongside shorter term debts - exacerbating a problem that lies at the heart of the credit crisis.
"Banks are hoarding cash," said David Brickman, the head of European credit strategy at Lehman Brothers. "We think the reason for that is the commercial paper markets. There was $100bn of commercial paper issued by European institutions that was scheduled to roll over in August, much of which struggled to do so.
"Those markets are just not functioning normally, so some debt has already come on to bank balance sheets and more will have to follow. We estimate that between September 11 and 19 $139bn [£68.5bn] of European commercial paper [will come] up for renewal, including monthly and quarterly maturities. That's why banks are hoarding cash."
Mervyn King, the governor of the Bank of England, last week made his first intervention in the money markets since the credit crisis began, pledging to inject £4.4bn into the overnight lending system if required.
DeAnne Julius, a former member of the Bank's Monetary Policy Committee, told The Sunday Telegraph: "The Bank has a responsibility to allow the smooth functioning of the sterling money markets and it has a pretty clear framework for doing that. But it needs to apply that framework to achieve the objectives it is aiming at. The experience of the last couple of weeks does not look as if it [the Bank] has been very successful at that."
Although the markets have viewed King as reluctant to bail out irresponsible lenders, the BoE has not ruled out further interventions. But senior bankers say King is unsure that pledging funds over a three-month duration would solve the liquidity crisis. He is said to share the view that the root of the liquidity problem lies in the commercial paper markets.
Market sources believe confidence will be restored only when all the sub-prime losses in the system have been exposed.
Christopher Wood, the strategist at Hong Kong-based brokerage CLSA Asia-Pacific Markets credited with predicting the US sub-prime crisis two years ago, said: "The sub-prime crisis has exposed the structured credit asset class as highly dubious. In five years' time it won't exist."
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