Banks may have to use cash stock piles

10 September 2007

As the credit crisis continues to hurt UK and European banks, they may be forced into paying $142 billion in the next ten days.

The sum may be paid if investors decline to buy the latest debt issues which are due for renewal.

With fewer investors buying the debt, banks may be forced to dip into their pockets to refinance the situation.

Investors are thought to be unwilling to buy the debt until the full impact of the US sub-prime crisis is revealed.

Commercial papers are bought by investors such as pension or insurance funds because they are considered to be very safe, they then make interest on these purchases.

The debts from the sub-prime crisis are sold all over the world, but investors do not want to buy European commercial papers because the effects of the sub-prime collapse are still unknown.

According to the BBC this is why UK and European banks have been keeping cash reserves to pay for the commercial papers they can't sell, and in turn they are less willing to lend because they need the cash to cover their debts, meaning that business loans come with much higher interest rates.

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