According to the ancient Mayan calendar the December 21, 2012 solstice marks the end of a 5,125 year Great Cycle. After that a new one begins and what is in store for humanity remains a mystery. Likely it will pass with the same underwhelming result as the Y2K threat. However, 2012 promises to be the end of another cycle that may have more impact on the planet than the Mayan prophecy.
In that year Banks the world over will have to roll over $5 trillion (yes 5 with 12 zeros behind it) in bonds. Of that about $ 1.3 trillion is in the US and $ 2.6 trillion in Europe. The rest is scattered about the globe and of less consequence.
Why is this important? Very simply put the European banks will be in competition with European Governments to raise new financing. The very same governments that provided the European banks with short term loan guarantees during the crisis so that they could issue debt to recapitalize and get stronger. Unfortunately, the guarantees were fairly short term so the banks issued short term debt that will be coming due, largely, in 2012.
This competition for financing will lead to a glut in the market and likely cause rates to increase. In addition the weaker banks will have to pay a higher interest rate on their debt making them less competitive. From there it follows there will likely be more bank mergers in Europe as the weaker banks get taken out by those able to borrow at much lower costs.
Should banks be unable to fund out their total requirements it means that credit for businesses and consumers alike will see lending slow down and those that are able to get financing will be doing so at a higher overall rate.
But who knows? Maybe the results of the stress tests that are to be released on July 23 will show that the largest 91 banks in Europe have no issues and that they are strong and that there really are no reasons to worry. But what about the hundreds of other smaller banks? And what if, as widely expected, the stress tests show some weakness?
Debt is insidious and so are its effects. At the current levels of debt the world over in the developed countries, a sovereign default, whether overt or covert (printing money) has a high probability of happening. It is this mountain of debt that has to be dealt with and the reality is that one way or another it will be. The results will vary depending on response, but either way it will end in tears.