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| - The US Federal Reserve is pumping money into an economy that may already be in recession to ensure banks keep lending to households and businesses battered by the coronavirus pandemic. The central bank on Thursday said it was encouraged by the reaction of financial institutions to some of its incentives, but even so, the efforts seem to have fallen short. There are rising fears of a liquidity crisis, as the lubrication that keeps the economy running dries up with disastrous consequences, including a cascade of corporate bankruptcies and massive layoffs. A few months ago, companies with highly-rated debt or solid business activity could raise fresh money without difficulty to finance their operations and transactions. This is no longer the case, said banking sources who spoke to AFP on condition of anonymity because they act as intermediaries between investors and companies. According to Dealogic, only 55 companies with solid credit ratings managed to raise $66 billion in fresh money from March 1 to 19, compared to the 172 in the same period last year that raised $127 billion. This week, there were no transactions on Monday, and less than a handful on Wednesday. Tuesday was the busiest day, with some $28 billion in loans, including to ExxonMobil and PepsiCo, the bankers involved said, while on Thursday, six transactions were underway, including Disney and Northrop Grumman. To make the deals, investors are demanding higher interest rates, a banker said. "The window is opened; it's not good but it's opened. It's not totally down," he said, but the Fed intervention should help in the coming weeks. Conversely, companies rated with poor credit ratings are out of luck. "Nothing is happening there," another banker told AFP. To ease the cash crunch, former Fed chairs Janet Yellen and Ben Bernanke this week recommended the central bank buy corporate debt directly, but that requires congressional authorization. The pandemic is shutting down business and prompting many companies to draw down their credit lines with banks, including Boeing ($14 billion) and Ford ($15.4 billion). Amid this the rush for funds, banks are turning off the tap and a large number of companies could find themselves short of cash very quickly, including FedEx and Archer Daniels Midland, Bank of America warns. To pay costs like wages and rent, companies issue short-term debt called "commercial paper," for terms that vary from one day to one week. In recent days, companies have not been able to pay off these loans, according to banking sources, and are asking for more cash to continue to produce even as their revenues have fallen. To encourage reluctant banks to continue to lend, the Fed has committed to buy this risky commercial paper. But the list of companies in need is long, from transportation to hotels and restaurants to the auto industry. These investment vehicles, also known as mutual funds, invest in corporate bonds, commercial paper and in Treasury bills, and are held by individuals and businesses. But even the most creditworthy companies have stopped paying their commercial paper, causing issues in the funds, bankers say. To avoid massive withdrawals, the Fed set up a mechanism to lend money to financial institutions which can then guarantee these funds. Faced with the influx of requests, banks are trying to determine whether a hair salon or a restaurateur in trouble will be able repay a new loan. The Fed can't help because it cannot own individual mortgages. The federal government, however, can, hence the importance of the stimulus plan being considered in the Senate that includes expanded small business loans. lo/vog/sdu/hs/cs
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