Debt crisis spreads to US municipalities
A collapse in confidence in a $330bn corner of the debt market has left US municipalities and student loan providers facing spiralling interest rate costs.
80 per cent of auctions held on Wednesday had failed. This is in the region of $29bn, traders said.
Banks advised to walk away from big deals
Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse.
This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals.
If this is too arcane, here's what this means:
- US municipalities are brutally discovering that one of their main sources of funding has disappeared overnight, and that they have to pay extortionate interest rates (one of the articles mentions 20%) to get emergency replacement funding. The same goes to entities providing student loans;
- banks are being advised to dump clients to whom they have already committed money, with the argument that the cost of that (in both financial penalties and reputational damage) is lower than the losses from proceeding with that funding. We're talking pretty desperate measures there.
In both cases, this is blamed on "cataclysmic conditions in the capital markets." As these markets increasingly look like dominoes, falling (or failing) one after the other (albeit in slow motion), as more bad news continue to pour in almost randomly, it is hard to find solace anywhere.
But the thing to note now is that the financial crisis is now hitting directly the "real" world - businesses and public entities are getting caught and have to pay a direct price.
