Credit Crisis Set To Deepen As World Banks Pare Lending

Sydney Morning Herald

Monday March 3, 2008

Jacob Saulwick

THE global credit shock, which is drying up funds for companies to expand and crippling the heavily indebted, is set to deepen as international banks wind back their exposure to borrowers.

The quarterly report of the Bank for International Settlements, which monitors the world's central banks, also noted signs that investors were losing their faith in emerging markets remaining resilient in the face of a serious downturn.

In the past 30 years, financial crises have all been preceded by a marked increase in banks lending to other banks overseas, the report said.

Late last year, for example, as the fallout from the subprime mortgage crisis intensified, cross-border lending hit the highest annual rate of increase since just before the 1987 sharemarket implosion.

But there are now signs banks, particularly in the US, are paring back lending to overseas borrowers.

A contraction in bank lending would intensify the crisis because other avenues for companies to get funding - such as issuing bonds or structured credit products - have all but disappeared, the report says.

Already, banks are having difficulty rolling over loans from other banks, driving up short-term market rates. Australian short-term rates hit their highest level since the onset of the crisis last year, increasing the pressure on banks to pass costs on to borrowers.

© 2008 Sydney Morning Herald

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