EUROPE, CHINA BRACE FOR WAVE OF DEFAULTS


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Businesses other than financial institutions owe about $13.5 trillion in bonded debt, according to the Organization for Economic Cooperation and Development. As the virus-induced panic stymies commerce, many of those debtors are at greater risk of not being able to repay what they owe.
Much of that debt was incurred to fund expansions while interest rates were at rock bottom. The financial viability of those expansions are now jeopardized by the global economic contraction.
The International Monetary Fund recently warned that an economic crisis only half as severe as 2008’s Great Recession could put 40 percent of that debt at risk.
The iTraxx Crossover Index, which measures the perceived risk of loan defaults by European companies with sketchy credit, rose 100 basis points in three days last week to 380, its highest score since 2016.
The rise makes it more expensive for banks and other corporate bondholders to buy insurance against these debtors defaulting on their loans.
With lenders flocking to U.S. Treasury notes and other highly rated bonds, there also will be fewer buyers willing to help high-risk companies roll over their debts, which add to the risk of a default wave.
Meanwhile, Chinese property developers have $20 billion in dollar-denominated bonds coming due this year, according to data from Idealogic.
The country’s developers hold about $185 billion worth of that kind of debt.
Missed payments on the bonds have been rare and outright defaults even rarer.
TREND FORECAST: With home sales falling and the coronavirus epidemic drying up many sources of new loans, prepare for defaults by Chinese developers who can’t find buyers for properties or lenders to refinance their loans.
The real estate prices that have skyrocketed in China following the Great Recession will rapidly reverse as the effects of the “Greatest Depression” drag down its economy.
 

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