Worse, the availability of short-term loans to companies is shrinking at an alarming rate. The market for commercial paper has shrunk by around $600 billion since last summer, with almost $100 billion of the reduction coming
in the past week alone. This hurts companies large and small. General Electric has had to raise new capital partly because of funding concerns. Retailers report problems financing purchases of holiday-season inventories. The
head of AutoNation, a car dealer, told CNBC that “banks were looking for every excuse to say no…We’ve gone from a credit crunch to a credit panic.” Firms say that some banks are trying to invoke “market disruption”
clauses to cut credit lines or raise the fees for renewing them, leaving corporate treasurers unsure how long they can pay employees or buy raw materials.
The pain is reaching municipalities and states. Alabama’s Jefferson County is on the verge of bankruptcy. California’s governor, Arnold Schwarzenegger, has reportedly given warning, in a letter to the Treasury, that his state is running out of cash to fund day-to-day operations and may need an emergency loan of $7 billion from the federal government.
While the Troubled Asset Relief Programme, or TARP, may ultimately unfreeze the mortgage market, restore confidence to banks and restart lending, that may take too long for a far more pressing problem, the blockage in the money markets. Tellingly, the yield on short-term government debt-the most popular destination for investors seeking safety-barely budged after the vote. Bank-to-bank loan spreads fell only slightly. American stockmarkets gave up gains built up in the hours before the vote.
While the TARP may lift confidence, the timing and extent to which it boosts their capital will depend on the prices paid, which remain unclear. Moreover, the target is moving. Even if house prices stabilise soon, non-mortgage credit will go on deteriorating as the economy shrinks. Bank regulators will have their work cut out as failures mount among small and medium-sized lenders. More will seek sanctuary in the arms of stronger rivals. On Friday Wachovia threw itself at Wells Fargo, only four days after Citigroup had agreed to buy its banking operations in a government-backed deal. Citi threatened to sue.