Banks may be forced to seek huge injections of fresh capital as the credit crunch shows no sign of abating, experts warned last night.
Analysts are talking about the possibility of rights issues, which would involve banks asking shareholders to subscribe to new equity in order to provide cash to bolster balance sheets that have been crippled by the US sub-prime debacle.
Rumours were circulating in New York and London on Friday that western banks face intense pain in the new year, with bad-debt provisions set to soar from $59bn to more than $250bn. 'That would knock the banks' balance sheets for six,' said one analyst.
Several brokers fear Merrill Lynch, in particular, could be hit further in 2008. Last week, it emerged that Merrill was seeking a $5bn investment from Temasek, an arm of the Singaporean state. Citigroup has already secured cash from Abu Dhabi, the Gulf state.
Gerard Lyons, chief economist and head of global research at Standard Chartered, said: 'Next year, we shall find out whether the crisis moves from being a liquidity squeeze to one about funding, with questions raised about whether banks are adequately capitalised.'
Rights issues or other capital injections are clearly on the agenda, he said.
In the City, a senior analyst said if funding became a problem, 'banks would have to sell assets, seek investors, such as cash-rich Asian or Middle Eastern sovereign funds, or launch rights issues'.
So that would be an increase in bad debt of about 400 percent, from a situation already acknowledged to be a major crisis.
Curious, I thought I would see whether insiders are talking about what this might mean openly on the Web. I should quickly note that I'm not an insider myself, just a working stiff who knows her meager pension (and her retired mother's ability to pay bills) is wrapped up with what happens in the financial markets, even though I don't invest directly myself, don't own property, and have so little in the bank that it is all protected under UK law.
The answer is, yes they are. Many posts I saw point the finger at companies like Bear Stearns, whose huge quarterly loss (its first) threatens the stability of various banks that have their own finances wrapped up in Bear Stearns hedge funds or similar. So it's not just about subprime loans, although the repackaging of those was one of the ways banks created vast amounts of precarious funny money with which to pursue additional investments.
What it appears to mean to people like me is that borrowing money is about to get very difficult, and not just for those with poor credit; It won't just be about mortgage loans, but also business loans, car loans and credit cards. Those of us carrying unsecured debt (i.e., credit cards and some kinds of personal loans) may find that our repayment terms are revised to benefit the banks--usually there is fine print in your agreement that allows the bank to do this as long as they inform you first--as that's another way they can shore up their sagging capital reserves.
I am personally hoping for a housing price crash in the UK as it's the only way I could ever afford to buy here, but recognise that the coming recession (depression?) will not really be good for anyone except corporate scavengers...
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