According to the Economist, Fannie Mae and Freddie Mac will have to refinance $223 billion of debt before the end of September.
But there seems to be only few who currently could lend such amounts of money and most of these are not interested. Medium players like the China Construction Bank cut their holdings of Freddie and Fannie. And while the headline of a recent Reuters news piece claimed Russia says keeps buying Fannie, Freddie debt, the text revealed something different:
Russia held about $100 billion in Fannie Mae, Freddie Mac and Federal Home Loan Banks’ debt at the start of 2008, but last month the central bank said the investment had been reduced by about 40 percent with maturing short-term holdings often not being replaced.
The rescue plan for Fannie and Freddie is to let the Treasury Department buy new issued preferred shares of these companies. This would practically wipe out all the regular shareholders. But it would also put some debt F&F issued into technical default. This again might trigger large negative effects in the debt insurance market and in private credit default swap derivative markets. Essentially nobody knows would could happen there, but the CDS market is huge and the Treasury move might initiate a very nasty chain reaction.
Also in September U.S. companies will have to refinance some $100 billion of short term debt. In the current environment investors will either stay away from the issue or will ask for significant higher interest rates.
The difference between corporate bond and Treasury yields—a measure of risk aversion—hit a record high of 3.12 percentage points on Thursday, according to Merrill Lynch data.
That difference may soon jump to 5% and then the credit crunch will really hit Main Street. Leveraged buyouts were the rage over the last years. Raiders with little capital bought up companies and pressed them to go deep into debt to finance the raids. When this usually short term debt is due for refinance, the rates will be significant higher and many of these companies will be in danger.
Towards the end of the year the credit conditions are likely to get even worse. Last December when the credit crunch reached a first peak, the Fed stepped in and allowed banks to borrow fresh money for dubious collateral. It committed nearly half its balance sheet to the various rescue schemes. That seriously degraded the Fed’s own balance sheet.
There is not much capacity left for similar tricks when this years crunch season appears.
But then, as Fed chief Bernanke once explained,
[t]he U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.