The US financial system faces a daunting challenge in the next five years: $4,200bn of debt that is largely of speculative quality comes due in the commercial real estate and non-investment grade debt markets. At best, this wall of maturing US debt will strain credit capacity. At worst, it will prolong the credit crunch and restrain economic growth.

The next two years are crucial, since delay by banks and other lenders in recognising losses on commercial real estate loans could lead to a pile-up of debt maturities in the credit system in 2012 as this is when loans to highly leveraged corporate borrowers begin to mature en masse.

Such a 2012 reclogging of the credit system, if it happens, could force businesses to liquidate bad investments or pressure the Fed to re-open the monetary and credit spigots, potentially complicating the Fed’s exit from its existing stimulus programs.

The biggest risk to refinancing capacity for this wall of maturing debt, though, is the Fed raising interest rates to control inflationary pressures and dollar depreciation, if necessary. Higher interest rates would preclude marginal borrowers from qualifying for refinancing, regardless of whether credit capacity exists.

Around $2,700bn of commercial mortgages comes due in the next five years, peaking in 2011, and $1,500bn of leveraged finance debt comes due, peaking in 2014. The pattern of contractual debt maturities is front-end loaded for commercial real estate and back-end loaded for leveraged finance debt.

As the credit bubble inflated prior to 2007, commercial mortgage lending nearly doubled and leveraged lending nearly quadrupled in the preceding five years. Securitisation markets played a key role in this rapid growth, but as of now that channel is all but closed for new credit capacity. Collateralised loan obligations (CLOs) and commercial mortgage-backed securities provided roughly 60 per cent and 20 per cent, respectively, of peak financing capacity in the leveraged finance and commercial real estate markets.

In contrast to prior credit cycles, speculative-grade debt maturities in this cycle are staggered. This is a double-edged sword: lenders have more time to work through exposures, but the system will take longer to clear losses. During the frenzy, banks originated leveraged loans with terms of 5 or 7 years rather than 364 days, for example, because securitisation buyers were willing to purchase longer-term loans than banks would have originated for their own portfolios.

Here’s the good news: owing to buoyant markets, this year borrowers have worked down more than $91bn of leveraged finance debt that was previously scheduled to mature by 2014, and real estate investment trusts have raised more than $18bn of new equity capital. Yet these amounts merely chip away at the estimated $3,400-3,800bn of cumulative refinancing capacity needed over the next five years (after deducting estimated losses).

As long as the capital markets remain buoyant, borrowers across the spectrum will keep recapitalising, selling assets, restructuring, pre-paying debt, purchasing their debt below par, and replacing loans with longer maturity bonds. The Fed has engineered a window to allow many borrowers the opportunity to refinance, and the decisions borrowers make now about whether to access liquidity could turn out to be fateful if credit again becomes scarce when these debt maturities peak en masse.

The challenge is daunting and the range of outcomes is wide. To illustrate, leveraged loan maturities in 2012-14 are so large that, if the CLO market remains closed but half were able to be refinanced in the high-yield bond markets, the issuance volume would almost double the 2006 peak in issuance of high-yield bonds. Separately, visibility into commercial property valuations is generally low, but we estimate the equity shortfall needed to refinance commercial real estate debt maturing by 2014 is between $200-750bn.

Yet there are reasons for hope. Commercial real estate lending by banks, insurers and government-sponsored enterprises remained fairly constant during the credit bubble at roughly $300bn per year. If these lenders can maintain capacity at this historical level, the market could clear. To do this, though, these lenders must replenish lending capacity by clearing their underwater loans.

The longer credit capacity remains tied up in underwater loans, the less financing is available to healthy businesses that fuel economic growth. The tighter the credit capacity, the more industries will bifurcate into the “haves” and “have nots” based on access to capital. The longer the credit crunch lasts, the more pressure the Fed will be under to support the credit system. And the more the Fed decides to do so by printing money or moving interest rates even lower, the greater the pressure on the dollar’s value.

Caitlin Long is head of Corporate Strategy, Capital Markets at Morgan Stanley