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repo markets don't help corporate debt at all, as long as the federal reserve don't accept the commercial paper (corporate debt, in other words). The moment the

repo markets don't help corporate debt at all, as long as the federal reserve don't accept the commercial paper (corporate debt, in other words). The moment the fed accepts commercial paper as collateral, yes, it does. However, this will lead to a bigger problem. If S&P drops ratings for many companies, many banks will end up holding bags; in which case, the fed will come to rescue these banks.

dev-ns8 7y ago
> "repo markets don't help corporate debt at all" I'm not sure I agree with this statement. The repo market may not help or hinder corp debt directly, but I think it very much so effects corporate debt. Corporations presumably get their loans from banks. What facilitates banks to make these loans? The Repo market. What happens if the repo market collapses / shrinks / endures instability? Banks most likely, would not be able to make as many loans and the rate for future loans would increase due to lower supply and higher demand. On top of future loans, this could have a negative impact to current outstanding loans held by corps. I'm not 100% sure the terms of corporate loans, but if they have variable rate loans with banks, this shrinking of loan supply coupled with increased demand for liquidity would surely hurt some of these corporations.
- raincom 7y ago
  Even before issuing loans, banks look at market conditions and ratings. In the present scenario, banks will stop giving loans to companies. When Fitch and S&P cut down ratings for many companies, banks become reluctant. Yesterday, the federal reserve agreed to take commercial paper with certain ratings. What repos do: swap one kind of IOU (I owe you) with another kind of IOU. This doesn't make banks to issue new loans to distressed companies, any more than you/I can give loans to a dead beat. During good times, everyone is happy to issue loans.

dev-ns8 7y ago

> "repo markets don't help corporate debt at all" I'm not sure I agree with this statement. The repo market may not help or hinder corp debt directly, but I think it very much so effects corporate debt. Corporations presumably get their loans from banks. What facilitates banks to make these loans? The Repo market. What happens if the repo market collapses / shrinks / endures instability? Banks most likely, would not be able to make as many loans and the rate for future loans would increase due to lower supply and higher demand. On top of future loans, this could have a negative impact to current outstanding loans held by corps. I'm not 100% sure the terms of corporate loans, but if they have variable rate loans with banks, this shrinking of loan supply coupled with increased demand for liquidity would surely hurt some of these corporations.

raincom 7y ago
Even before issuing loans, banks look at market conditions and ratings. In the present scenario, banks will stop giving loans to companies. When Fitch and S&P cut down ratings for many companies, banks become reluctant. Yesterday, the federal reserve agreed to take commercial paper with certain ratings. What repos do: swap one kind of IOU (I owe you) with another kind of IOU. This doesn't make banks to issue new loans to distressed companies, any more than you/I can give loans to a dead beat. During good times, everyone is happy to issue loans.