- Banks are starting to worry about liquidity as demand for funds is coming from all angles.
- Corporate borrowers who secured low-margin loans before coronavirus hit markets are being asked to look elsewhere for funds.
- As liquidity dries up across the board, the debt bubble in the U.S. will likely burst.
There’s no doubt that coronavirus will plunge the U.S. into recession as economic activity grinds to a halt. The ‘v-shaped’ recovery that pundits were once pointing to is starting to look like a pipe dream as an epic debt bubble casts a terrifying shadow over the U.S. stock market.
Over the past few years, reckless borrowing among U.S. corporations has been no secret. Every quarter economists questioned how much longer businesses could survive on a diet of over-inflated debt and profitless operations. Still, the stock market marched ever higher and warnings about a recession were ignored.
Banks Scramble to Prepare for Recession
Coronavirus has lit the fuse on a massive debt bomb that could stretch banks to their absolute limits.
Against the backdrop of an unstoppable bull market, banks opened up a host of investment-grade revolving lines of credit. Many were low margin loans and some even lost money. But banks continued to hand them out in an effort to secure future business and reinforce relationships with big clients.
When the world ground to a halt over coronavirus, businesses found themselves suddenly devoid of cash. That prompted many firms to turn to their existing credit lines to shore up their cash coffers.
According to Bloomberg, banks saw a surge in borrowing throughout March as companies tapped into cheap revolving credit lines they’d secured in better times. If everyone were to do that, banks would find themselves high and dry. So bankers started asking their clients to take out new loans instead of tapping existing lines of credit.
Bank Exposure Paints Scary Picture