Over the past couple of weeks there’s been chatter about companies possibly not being able to pay workers because of the credit crunch. The idea is that without ready access to the commercial paper market—which big companies use to issue short-term IOUs—there won’t be enough money to finance things like inventory and payroll.
The commercial paper market has seriously been slammed: at $1.6 trillion, it’s 27% smaller than when the credit crunch began in the summer of 2007. A lot of that drop came right at the outset and was due to asset-backed (i.e., real estate-related) paper. In recent weeks, even non-financial companies that don’t have anything to do with houses or mortgages haven’t been able to float issues—which is why the Federal Reserve is going to start buying commercial paper directly, in an attempt to jolt the market back to life.
But just in case that doesn’t fix everything overnight, as these solutions often don’t, I’d like to say right now that I don’t think we’re likely to see a rash of companies turning up empty-handed on payday. Companies—and we’re talking large corporations here, not small businesses—get money for expenditures, like paychecks, from a number of sources. From commercial paper, sure, but also from longer-term bond issues, bank lines of credit, liquid assets sitting on the balance sheet, and, importantly, from selling whatever it is they sell. If a company can’t float commercial paper, and on top of that is having a tough time getting an extra line of credit from a bank (they’re still being persnickety about lending, too), there is still that good old-fashioned fallback of financing operations with profit.
Part of the reason I think that this is, for otherwise healthy companies, still feasible on a mass scale, is because companies haven’t always so heavily depended on commercial paper. For non-financial firms, even just four years ago, the market was a fraction of what it is today. Check out the amount of commercial paper outstanding (courtesy of the Fed):
Does not having access to commercial paper cause some companies to make hard decisions about expenditures? I have no doubt. Does it push up the cost of borrowing, and rejigger notions about how much they should be hiring or investing in new equipment? Absolutely. Does it push them to the point of not being able to scrape together enough cash on a particular Friday to pay employees? I think we’ve all learned to say nothing is impossible. But I’d be surprised.