Crisis Awaits World’s Banks as Trillions Come Due

The sovereign debt crisis would seem to create worry enough for European banks, but there is another gathering threat that has not garnered as much notice: the trillions of dollars in short-term borrowing that institutions around the world must repay or roll over in the next two years.

The sovereign debt crisis, like the onset Great Depression in 1929-1932, is everywhere. The US dollar is enjoying a safe haven bid relative to other fiat currencies due to fears that the Euro will disintegrate. The dollar strength in no way reflects true safety. California, New York, New Jersey, Michigan, etc are infected with the same debt and balance sheets problems of the higher profile, weaker members of the European Union.

Safety is a relative term. The dollar can continue to rally on capital flows seeking safety within the fiat world, but ultimately, the same forces that cause them to flee the Euro will take down members with the US Union. The term setup before the fall comes to mind with the U.S. dollar.

A change in the direction in the credit spreads or ratio between long term high grade corporate bonds and government bonds total return index, similar to July 1932 and the revaluation of gold by 1934, will mark the transition of capital flows from public to private sector. This will mark the end of the illusionary rally in the dollar.

Long-Term U.S. Corporate Bonds Total Return Index (LTCBTRI) to Long-Term U.S. Government Bonds Total Return Index (LTGBTRI):


Source: nytimes.com