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Money, investment capital, comes from two different groups of investors:

  1.  The Money Market, short term - up to a year (max) - using commercial paper, banker's acceptances, time deposits, etc. instruments

  2.  The Bond Market, long term - up to 20 years - using notes and bonds.

Without going into a long explanation, a firm can get more money in one fell swoop in the Money Market than in the Bond Market; we're talking a project being able to get (roughly) $100 million in the Money Market versus $10 million in the Bond Market.  The reason is the longer the investment period, the greater the perceived (and actual) risk of the lender not getting their money and interest payments.

What this does is shift the risk of a project to not being able roll-over its loans.  If you've borrowed $100 million for six months you have to go back to the Money Market for $100 million every six months.  Nobody cared about the risk since they assumed the money would always be there.

Well ...

This whole thing started, as I said when it started, by banks not lending, short term, to each other.  What Jerome is saying is EU banks have now taken the next step and are starting to halt lending short term to everybody else.    

This step means, as I predicted when this whole thing started, the global financial crisis will really get going when firms are unable to roll-over their debt.  Even if you only need a piddling $100 million if you can't get it ... you're bankrupt, gone, finished, kaput.  You close your doors, go into receivership, and (critically) fire your employees!

Which ramps-up the old micro-economic Positive Feedback Loop in the Negative Direction to eleven.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Thu Sep 15th, 2011 at 12:43:37 PM EST
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