Credit markets stuck despite rebounding stocks

Stocks are rebounding and a new bailout package could be coming soon, but the credit markets — where day-to-day borrowing occurs to keep the gears of the economy turning — are still stuck.

Even relatively healthy businesses, large and small, are feeling the chill. Some examples, from near and far:

• The Everett Clinic, a 300-doctor medical center in Snohomish County, learned last week the interest rate it pays on its variable-rate bonds would jump from 2.8 percent to a whopping 11 percent.

That'll cost the clinic $4 million a year, medical director Dr. Al Fisk said: "It reflects the fact that the capital market is in great disarray and is not functioning very well."

• When Traverse Bay Confections of Tukwila negotiated a new line of credit with its bank this summer, owner Richard Anderson said the bank insisted on limits it had not imposed before.

That, in turn, limits how much the candy-and-cookie company can grow, Anderson said: "There's been a drastic change in scenery out there."

• Randall Stephenson, the CEO of AT&T, said that when the telecommunications company tried to get short-term cash last week by selling corporate debt known as commercial paper, no one was willing to lend anything for longer than overnight.

The crunch is being felt by others, too. Many small businesses can't get money for supplies and some are falling behind on their payrolls, said John Castellani, president of Business Roundtable, an association of CEOs of companies that employ more than 10 million people.

Castellani said the credit problems have been going on for several months but have accelerated in recent weeks as lending tightens further and consumer spending wanes.

"It feeds into itself," Castellani said. "It just continues to spiral down."

The key bank-to-bank lending rate — the London Interbank Offered Rate, or Libor — rose to 4.05 percent Tuesday from 3.88 percent for three-month dollar loans and to 6.88 percent from 2.57 percent for overnight dollar loans — the highest level since the British Bankers Association began tracking that rate in 2001.

That's especially worrisome, because usually overnight Libor is just slightly above the Federal Reserve's target federal funds rates, another overnight interbank lending rate. Now, it is more than 4 percentage points above the target rate of 2 percent.

That has troubling implications for other lending rates tied to Libor, including homeowners' adjustable-rate mortgages.

For Americans already worried about their nest eggs, mortgages and costs of fuel, food and medical care, the prospect of an even deeper downturn is troubling — especially because it's so hard to understand how we got here.

Soured bets

In simple terms, banks made bets on the housing market when it was booming and didn't cash out in time. When people started defaulting on mortgages last year, banks' investments went bust.

As banks' losses started piling up, they pulled back on lending and started stockpiling cash.

Already-cash-strapped banks got even stingier this week, after the House rejected the Bush administration's $700 billion bank-rescue package Monday.

This is a problem because companies — even big, strong ones — borrow money to operate and grow, especially when the economy is weak.

Fisk, of the Everett Clinic, said the higher interest payments probably will keep the medical center from expanding to keep pace with fast-growing Snohomish County. It sold the bonds to build satellite clinics and to computerize its patient-records system, he said.

In a letter to the state's congressional delegation this week, clinic Chief Executive Richard Cooper warned that "unless some order is restored to the financial markets, rates could continue to climb."

"Also, unless confidence is restored, it may be impossible to finance debt at any interest rate," Cooper said.

At Traverse Bay Confections, Anderson said the bank had increased the limit on his line of credit as he paid it down, but the new agreement doesn't allow for that. So the company, with annual revenues of about $2 million, won't go after big contracts because of the uncertainty over financing.

The credit crunch also has stalled some new development in the Greater Seattle area.

In Federal Way, for instance, construction of the first phase of a high-rise, residential-commercial project in the city center has been pushed back because of troubles obtaining financing.

"The credit's just not opening up," said Patrick Doherty, the city's economic-development director.

In recent decades, large companies have borrowed money by selling short-term and long-term bonds. This means they take a loan from an outside investor and promise to pay it back with interest after a certain amount of time.

The investor agrees to the deal because they trust the company will pay the debt.

Shattered trust

That trust, however, has been slammed by the downfall of big names like Lehman Brothers Holdings and American International Group.

No one really knows who's invested in what — a seemingly safe money-market mutual fund known as Primary Reserve Fund "broke the buck" two weeks ago because it had exposure to Lehman Brothers. When a fund breaks the buck, it means it does not have enough assets to cover each dollar that had been invested.

Most companies right now cannot sell commercial paper for longer than overnight or a couple of days, as opposed to a more typical period of one to two months, former portfolio manager Steve Traum said.

A big reason why is that money-market funds, the biggest buyers of commercial paper, are extremely cautious.

"They don't know where the next problem is going to arise," Traum said.

As a result, most money-market funds are pouring their cash into Treasury bills, considered the safest short-term investment.

This report contains information from Seattle Times business reporter Eric Pryne and The Associated Press.