It has to find €10bn (£7.3bn) in redemptions to the IMF, the ECB and other bondholders before the end of August and the money is not there.
In the way of these things, the redemptions have run at well over the level of the holdings of the bond they have been around ¥1,000 billion, or almost ten times the value of the bond and the scale of redemptions forced the bonds below their face value.
But a large part of those flows reflected banks' own leverage as they both borrowed and lent heavily abroad.Tellingly, the event that touched off the crisis in the summer of 2007 was an announcement by France's BNP Paribas that it was suspending redemptions to an investment fund heavily invested in American mortgage securities.
Even if a deal is struck the funds will quickly be swallowed up, not least by those ECB redemptions.
Citadel, Chicago's biggest hedge fund, has suspended redemptions on its two biggest funds.
Governments are deliberately maintaining the gross level in order to provide liquidity, but rising redemptions will mean that the outstanding value of bonds will fall in every major market apart from Japan.
Then, managers were hit by investors' redemptions and had no choice but to close; today many are electing to walk away.For some managers, the markets have become too stressful.
One study found that mutual funds holding illiquid assets were more likely to suffer investor redemptions because of bad performance than were funds holding liquid assets.From runs to fire sales"Collective attempts at liquidation to meet withdrawal requests would lead to ruinous fire sales," write Stephen Cecchetti of Brandeis University and Kim Schoenholtz of New York University.
Indeed, in many bear markets, notably those of 1966, 1969, 1973-74, 1977 and 1981, redemptions actually slowed (though sales of additional fund shares slowed even more), says Avi Nachmany of Strategic Insight, a consultancy.Odder still, managers of mutual-fund portfolios have not responded to redemptions as one might assume: by selling out positions.
"We do not know what sort of change in strategy it would induce," says Henry Kaufman, an economist and investment manager, but if the redemptions continue, the liquidity of positions will inevitably become a greater consideration.
The fund, launched when investors were incredibly enthusiastic about property, was Britain's biggest seller of the year.Step forward to November this year and New Star was forced to suspend redemptions in the fund because it lacked the liquidity to meet the demands of investors who wanted to withdraw their money.
