The Maturity Wall of 2012

From the New York Times:

When the Mayans envisioned the world coming to an end in 2012 — at least in the Hollywood telling — they didn’t count junk bonds among the perils that would lead to worldwide disaster.

Maybe they should have, because 2012 also is the beginning of a three-year period in which more than $700 billion in risky, high-yield corporate debt begins to come due, an extraordinary surge that some analysts fear could overload the debt markets.

With huge bills about to hit corporations and the federal government around the same time, the worry is that some companies will have trouble getting new loans, spurring defaults and a wave of bankruptcies.

The United States government alone will need to borrow nearly $2 trillion in 2012, to bridge the projected budget deficit for that year and to refinance existing debt.


Sovereign debt aside, the approaching scramble for corporate financing could strain the broader economy as jobs are cut, consumer spending is scaled back and credit is tightened for both consumers and businesses.

The apocalyptic talk is not limited to perpetual bears and the rest of the doom-and-gloom crowd.


The result is a potential financial doomsday, or what bond analysts call a maturity wall. From $21 billion due this year, junk bonds are set to mature at a rate of $155 billion in 2012, $212 billion in 2013 and $338 billion in 2014.

Interesting that they would catch up on this just now. The German Spiegel has an article along the same lines as well. The signs have been on the wall for some time though.

In December 9, 2009 Mario Draghi, Governor of the Bank of Italy and Chairman of the Financial Stability Board, said (emphasis mine):

The crisis has implied a massive transfer of debt from the private to the public sector. Fiscal
positions have deteriorated across the board at an unprecedented pace. Public deficits in the
G7 countries have surged from 2% of GDP in 2007 to 10% today.
The limits set by the
Stability and Growth Pact will be exceeded until 2014 at least for the euro area. Although
necessary and unavoidable, those extraordinary borrowing needs, combined with long-term
fiscal challenges on healthcare, pension systems and climate change, will lead to public debt
in excess of 100% of GDP in OECD countries in 2010 (up from 74% in 2007).

On the funding front, there are also heightened risks of crowding out. Global refinancing
needs are firmly skewed towards shorter term maturities. Estimates differ, but bank and
corporate bond redemptions hover around USD 3 to 4,000 billon annually from 2010 to 2012
double the annual amount of the mid-2000s. Roll-over of government debt will come on top
of those needs
. Leveraged borrowers such as high-yield companies also face refinancing
pressure. And securitization markets are thawing only very slowly.
Overall, markets will need to refinance higher debt levels with lower average quality and with
a reduced tolerance towards leverage, in a time window when support schemes will
progressively unwind. Such absorption pressure may well lead to higher and more volatile
funding costs. Therefore, it is now time that financial institutions and corporates engage
proactively in lengthening their debt profile and tapping global markets in an orderly fashion
given the risk that they may otherwise be forced to raise funds under less attractive terms.

Well, so lets get this straight. According to Draghi, we are in this mess, because the public took over the private sectors, i.e. the financial sector, debt. He calls it ‘unavoidable’ and we’ll just see why.
“Roll-over of government debt will come on top of those needs.” says it all doesn’t it. First the private sector will be serviced, of course not everyone will get something. They can pick and choose. Only then the governments will get a shot a refinancing themselves.
Sounds like crowding out of governments, does it.

Full text attached here:

And Moody’s describes the scenario to us this way:

The US rating agency said the US, the UK, Germany, France, and Spain are walking a tightrope as they try to bring public finances under control without nipping recovery in the bud. It warned of “substantial execution risk” in withdrawal of stimulus.

“Growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion,” said Pierre Cailleteau, the chief author.
“We are not talking about revolution, but the severity of the crisis will force governments to make painful choices that expose weaknesses in society,” he said.

One wonders, if we are going to make it to 2012 then. The bright side is though, the bankers have gotten and still get their bonuses for doing this to the world.

Makes me sick, really.