The next big threat to bank earnings may be corporate defaults on debt, much if it originally supplied by the banks themselves. The irony is that the problem could be solved by the banks, if they won’t open their vaults and provide more capital to companies who are in the process of refinancing.

But, they won’t. At least not without being forced to do so by the government. Banks don’t want to put their earnings in greater trouble by offering more risky loans on top of the ones they already have issued. As the recession deepens, they have no reasonable way to evaluate whether they will be paid back.

For debt which is rated junk, the reluctance of the banks is understandable, but the issue reaches far beyond firms with highly risky credit profiles., The New York Times reports that "This year alone, more than $700 billion in corporate loans will come due, according to Standard & Poor’s. "

A number of large American companies are left without access to capital by the trend. These include The New York Times (NYT) itself, which has $400 million in debt due at the middle of this year. Other corporations from Sirius (SIRI) to cable giant Charter (CHTR) to large telecom firm Level 3 (LVLT) may be forced into Chapter 11 or liquidation because they cannot tap funds that would have been readily available two years ago.

When companies are able to borrow, they are paying interest rates of 10% or higher. Servicing that debt requires a large part of operating income which means that the money borrowed may solve short-term problems but it robs money from operations as time passes. High debt service costs become a boat anchor in and of themselves.

The trend makes it more likely that the US will have to do what the UK has announced that it will do. The Treasury may have to step directly into the corporate debt market and sponge up paper from private enterprises to take the credit obligations of American corporations out of the hands of financial institutions. It is a hell of a way to fix the credit crisis, and its eventual consequence is that the federal government does not just end up owning big pieces of banks. It ends up owning pieces of companies across a wide spectrum of industries.

In the final analysis, the government becomes the source of capital for the engines of private enterprise.

Douglas A. McIntyre

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