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Last Updated: Monday, 10 September 2007, 09:23 GMT 10:23 UK
Banks could face 70bn debt bill
Banks rely on such debt to boost their short-term cash flows
Leading UK and European banks may be forced to pay out as much as 70bn ($142bn) over the next 10 days as the global credit crunch continues to bite.

The banks may have to pay out that sum if investors, such as pension funds, decline to buy the banks' latest debt issues which are now due for renewal.

Analysts say investors are reluctant to buy the new debt until the full impact of the US home loans crisis is known.

With fewer buyers for the debt, banks may have to refinance it themselves.

Banks' cash flow

Officially called "commercial paper", banks use the issuing of such short-term debt to help boost their day-to-day working funds or cash flow.

Many of the loans that are due to mature have been financed for three months or less.

Institutional investors, such as pension or insurance funds, are usually happy to buy the commercial papers, as the banks then pay them interest, and they are traditionally seen as very safe investments.

However, all this has now changed since the start of the ongoing crisis in the US sub-prime mortgage sector, which specialises in higher risk loans to people with poor credit histories or those on low incomes.

As US mortgage rates have risen sharply over the past year, it has led to record levels of loan defaults and home repossessions.

Unknown sub-prime exposure

This crisis has spread across the Atlantic, as US sub-prime loans are often combined with other debts and then resold around the world.

Investors are therefore said to be much less willing to buy the latest commercial papers of European banks until the full extent of their possible exposure to the US sub-prime market is known.

Analysts say this is why UK and other European banks have been stockpiling cash to pay for any commercial paper renewals they cannot sell.

The further knock-on effect of this, means that banks are less willing to lend money to other lenders or businesses, as they need to reserve cash to cover their own debt obligations, exacerbating the ongoing lack of credit in global markets.

This means that businesses both large and small currently face much higher interest rates if they want a bank loan.

An unnamed boss of one of the UK's largest banks told the Sunday Times at the weekend that conditions in the money markets were the worst for 20 years.

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