Global investors have their eyes peeled on the Evergrande Group or the Evergrande Real Estate Group, China’s second-largest property developer by sales. Evergrande Group shares nosedived on Monday dropping to 11-year lows and many analysts and economists are concerned about a possible credit contagion. Credit problems with China’s real estate industry have affected global markets a great deal as European and U.S. stocks have slid during Asia’s overnight.
Evergrande Group’s Counterparty Risk and Liquidity Shocks Could Spark a Credit Contagion on a Global Level
Many people woke to the news of China’s Evergrande Group losing a significant amount of its market capitalization as the company’s shares dive-bombed to an 11-year low. While Evergrande losses can’t take down the economy alone, but it could cause a domino effect like the collapse of Lehman Brothers did during the 2007-2010 financial crisis. The domino effect is called a “credit contagion” and signs of this occurring are already happening.
Other mega Hong Kong and China-based real estate giants are feeling the heat of Evergrande Group’s losses and the possibility of the firm defaulting. Hong Kong’s Henderson Land Development Co. saw a significant selloff and Ping An Insurance Group Co. also saw shares tumble. The Hang Seng Tech Index plunged in value on Monday morning as the news roiled markets. Analysts and economists believe that the debt from Evergrande could move to other lenders and bond markets in the near future.
Basically, a credit contagion happens when counterparty risk and liquidity shocks take place in the market and it causes creditors to deleverage their positions and move to safer venues. Zero Hedge columnist Tyler Durden explained that the market is expecting China’s Evergrande Group to default on a number of payments which will spark a significant domino effect across global markets.
“Speaking of Evergrande’s imminent default,” Durden wrote on Monday. “We noted earlier that while the company is scheduled to pay $83.5 million of interest on Sept. 23 for its offshore March 2022 bond, and then has another $47.5 million interest payment due on Sept. 29 for March 2024, the day of reckoning may come as soon as Tuesday: that’s because Evergrande is scheduled to pay interest on bank loans Monday, with a one-day grace period,” the author added. Durden’s critique of Evergrande solvency continues:
In other words, should it fail to arrange an extension, it could be in technical default as soon as Tuesday (for a much more detailed analysis of next steps please see This Is How Contagion From Evergrande’s Default Will Spread To The Rest Of The World.) Spoiler alert: a default is coming because Chinese authorities have already told major lenders not to expect repayment.
So far, Bloomberg and Durden’s Zerohedge have reported on at least eight investment-grade companies that have pulled their bond offerings over the Evergrande crisis. Moreover, Durden and many others predicted Evergrande’s falter months ago as one person tweeted: “Evergrande bond flush update. If you’re wondering why you should care… you will learn soon” on July 20, 2021.
Janet Yellen’s Plea to Raise the Debt Ceiling Before Possible October Default
Meanwhile, U.S. Treasury secretary Janet Yellen has shown that she is concerned about defaults. On Sunday, Yellen asked lawmakers in Congress to raise the federal debt ceiling and said that if the U.S. defaults on debt it could be disastrous by compounding on top of the Covid-19 pandemic effects.
“We would emerge from this crisis a permanently weaker nation,” Yellen stressed. While Evergrande’s imminent default is being predicted, Yellen said the U.S. could default by October. At that time, the Treasury will have exhausted all the cash reserves it has on hand and will be limited by the debt ceiling, the Treasury secretary said.
“We can borrow more cheaply than almost any other country, and defaulting would jeopardize this enviable fiscal position. It would also make America a more expensive place to live, as the higher cost of borrowing would fall on consumers,” Yellen explained. “Mortgage payments, car loans, credit card bills—everything that is purchased with credit would be costlier after default.”
On Monday, U.S. stocks like the Dow Jones, Nasdaq, NYSE, and more dropped a great deal in value during the morning trading sessions and have continued to sink lower as the day continues. Gold markets dropped to lows not seen in six months and the crypto economy shed more than $250 billion in 24 hours time.
