The worst crisis: Debt with illiquid assets as a counterpart

If an economic agent has issued debt to finance an illiquid asset, it may face severe problems if it becomes difficult to roll over this debt (recession, rising interest rates, increasing risk aversion) since it cannot sell the illiquid asset, and since it then default s as a result . This configuration can appear for: Companies, if they finance capital investments by loans; Banks, if they finance loans by borrowed short-term funds; Investment funds and securitisation vehicles, if they finance illiquid asset holdings (corporate bonds, mortgage loans, etc.) by borrowed liquid funds. We therefore look at, in the United States and the euro zone, trends in companies’ debt and their liquidity reserves, in the gap between banks’ loans and long-term funding, and in illiquid assets held by investment funds or securitisation vehicles . The two identified risks are found in companies and investment funds in the euro zone.