While corporates raised a record $301bn in investment grade bond sales to end June, financial institutions arranged just $38.4 billion in leveraged, or high-yield, loans in the first half of 2009, an 80 percent drop from the same period in 2008, according to Bloomberg data. Critical to an economic recovery taking hold (and indeed inflation expectations via the money multiplier) is the speed at which banks commence lending again, particularly to business customers. The chart below tracks the latest loan officer surveys in the major economies (expressed in terms of the net percentage of banks tightening rather than loosening credit).While in the the US credit availability remains historically tight, albeit improving, the UK has seen a much faster reversal in bank's willingness to lend, no doubt in large part due to the partial nationalization of leading institutions like RBS and Lloyds, combined with the impact of BOE Quantitative Easing on the corporate debt market. Unlike the US, the UK has adopted a transparent Asset Protection Scheme, insuring bank balance sheets against  losses beyond a predetermined level for a premium and in return for guaranteed lending levels. However, BOE figures also showed that M4 lending to businesses fell by GBP2.0 billion from April, and was 2.1% down on the same month in 2008, a steeper fall than the 1.4% decline recorded in April.

A record $978.5 billion of leveraged loans were made in 2007 as banks competed to finance the largest buyouts ever. No longer able to rely on banks for a steady supply of capital, borrowers are selling bonds and using the proceeds to repay short-term debt and loans. Unsecured commercial paper outstanding plunged 31 percent to $1.15 trillion, the lowest level since September 1998, Fed data show. Proceeds from about 60 percent of high-yield bond sales this year through May were used to pay down bank debt, according to S&P. That compares with 17 percent in the same period of 2007. Even cash-rich companies like Microsoft and Pfizer are opportunistically raising cash in the bond makets as they move to a more conservative capital structure. After the shock of recent events, consumers, like corporates, are now paying down bank debt as fast as they can. Ultimately, even if the credit spigot could somehow be turned back on by government diktat (and even if that outcome was desirable, which it isn't), the fact is that demand for credit will be limited for many years to come, as we see a cultural shift to a more restrained financial culture. The implications of that change, still widely misunderstood, will continue to ripple though markets for the foreseeable future.