Banks to UK corporates: Stop borrowing - now!

From CNN (via Dow Jones) comes news that banks are asking their top UK corporate clients not to borrow money from them.

Corporates are being asked not to draw down on long established lines of credit. So the long and the short of it is that banks can’t afford to do some of their most basic business. More evidence that the credit crunch is only just getting into its swing.

It’s vindication also for Jan Hatzius - the economist at Goldman who put numbers to the notion that the credit crunch was going to spill violently into the “real economy” with a severe reduction in banks’ lending to businesses. First signs of Hatzius’s “substantial recession”?

Where does this leave us?

Banks taking Q3 writedowns had a misleading sense of finality to it. And now it seems we should be ignoring all that prattle about the current squeeze in Libor etc. being in line with seasonal expectations - it seems it might be more than that.

Things are getting worse than they were in September - the wedge is starting to broaden; the screw beginning to turn:

Libor is rocketing - to such an extent that it’s becoming ever more tendentious simply to cite the end-of-year pinch as the proximate cause for the current spike. As reported on the front page of Tuesday’s FT, we’re in the sixth month of the credit crisis, and the cost of lending has risen in every one.

Commercial Paper (CP) markets remain frozen. A major source of funding has been all but wiped out - ABCP issuance is at new lows this month. There’s only so long that banks and SIVs can depend on their MTN programmes to keep things ticking over. Others are already grabbing credit lines. Alliance & Leicester secured £11bn in loans from a consortium of banks - aware that it couldn’t rely on its current funding model.

SIVs are starting to collapse. No one will touch SIV CP, which means banks are going to have to start committing liquidity - like WestLB and HSH Nordbank on Tuesday - or else consolidate them on balance sheet, like HSBC has done. The other option is the M-LEC supersiv. Enough said.

And way back at the root of all this, subprime foreclosures have yet to peak. It’s not without reason that the US Treasury is putting together a strategy to rescue troubled homeowners and reduce foreclosures with some haste. Widespread mortgage-rate resets next year would trigger another bout of MBS trouble.

Finally then to a case in point for all this bank-led mess: Citi. According to a Dow Jones’ story:

Several bankers have said Citigroup is one of those most affected and that the bank was asking some clients not to use standby facilities, which are part of the normal relationship banking arrangements made between banks and companies.

How bad for a bank can it be?

Citi has taken massive writedowns; wildly exposed itself to structured mess; lost its CEO and is still headless; found itself in cahoots with the US government organising a SIV bailout; narrowly shirked a dividend cut by selling a massive call option to Abu Dhabi; and now is pleading with clients not to borrow money from it.

http://ftalphaville.ft.com/

Please stop borrowing, please ! We´re "only" a credit crunch bank ! Ha, ha, ha...