You may remember my chat with the neighbour about the world banking crisis. I was telling him about bank liquidity drying up, banks reluctant to lend to each other, and how this would affect people in the street like ourselves.
You don’t have to like banks, and who does, to realise they serve a purpose of keeping the wheels of the country going around.
My neighbour called out over the fence.
‘I’m concerned about what you told me. I depend on the bank for funding my business, and if I was to lose out at this time, it would wreck me.’
I said: ‘This crisis started in America with subprime debt and house foreclosures reaching record levels. Now it has spread to Europe, and the trickle down effects is affecting people all over the world.’
My neighbour can take difficult news only in small bites. ‘You really are a doom merchant. I wouldn’t take you to cheer up a sick friend, you’re just a sourpuss seeing the worst of everything. You have to look on the bright side for a change.’
‘I would like to, but there isn’t much cheer at the moment. Being the debt king, I can’t afford to live in a dream world. How you can do so and still run a business, beats me. But if you don’t want to know more of the sorry mess we’re in, I’ll stop now.’
‘Don’t get on your high horse. You better tell me more.’
‘It’s sobering to realise just how much the international debt market has tangled itself up. Less than a month ago (November 27 2007), Citicorp the largest bank holding company in America had to be baled out by the oil rich principality of Abu Dhabi.
‘The bale out was US$7.5 billion by way of a convertible note issue at a coupon rate of 11 per cent. For such a leading bank group to be desperate enough to pay 11 per cent for core capital says a great deal about the debt crisis. This is a bank group with total assets of US$2,358 billion and has more than 200 million customer accounts around the world.’
‘You’ve jolted me. It is almost unheard of for a principal bank to pay 11 per cent . It is an excessively penalty rate. If they have to pay through the nose, what would they charge if my business needed a top up.’
‘Just another titbit to further wake you up, the Financial Times in London reported the other day that the investor strike against asset backed commercial paper (ABCP) extended to 17 straight weeks. This market, used extensively by banks for short term funding has now contracted by one third in the period since August 2007. The buyers’ strike is severely impacting on growth in securitisation, which has become the normal route for financing home loans.’
‘Thanks very much. I told you ..you are a killjoy. I’ve had enough for now.’
