A Boston University paper published earlier this week reckons that haircuts of up to $500 billion owed by more than 60 countries will be necessary to avoid “cascading defaults”. The United Nations reckons debt worth $148 billion must be written off by 2029 to avoid a new debt crisis. The disagreement between international leaders is not about whether a new global debt relief scheme is needed but rather how big and ambitious in scope it should be. Most are developing countries, around half of them in Africa, but should they start defaulting, EU states and banks would take a hefty financial hit. 3.Roughly 60 countries are in serious danger of debt distress or default in the next two years, according to the World Bank, International Monetary Fund, and United Nations. However, "the key question is whether the state will choose to intervene by providing support with additional capital, or by imposing losses on equity holders and debt holders first to reinforce market discipline," he added. As risks go up, firms have to offer higher returns to draw investors.Ĭhang said China has enough money on hand to address Huarong's problems.
In the event of a Huarong default, the cost of capital could rise "significantly" for other state-owned companies as "markets re-evaluate perceptions of implicit guarantees by the state," Chang Wei-Liang, macro strategist at Singapore bank DBS, told CNBC via email. Regulators are pushing Huarong to sell non-core assets as part of a revamp, according to a Reuters report in early June.
However, the bank added: "If there is a disorderly default of Huarong's dollar bond, we could see a broad sell-off of China credits, especially (investment grade) credits." If Huarong's case is resolved with government support, it should boost China's asset management sector, as well as other Chinese government-linked entities, says Bank of America.
Nomura said LGFVs are a "major focus" of China's tightening drive, and noted that bonds issued by the sector surged to a record 1.9 trillion yuan ($292.87 billion) last year, from just 0.6 trillion yuan in 2018. In 2015, electrical equipment manufacturer Baoding Tianwei became the first state-owned enterprise to default on its debt, following the first default in China's modern onshore bond market a year earlier. As a result, they could tolerate more credit risk," Hu said, noting it's only a matter of time before an LGFV bond default occurs. "The year of 2021 is a window to break implicit guarantee, as it's the first time in a decade that policymakers don't have (to) worry about the GDP growth target. "They could survive only because of the supports from the governments." Zombie companies are those that are heavily indebted and rely on loans and government subsidies to stay alive. "Many LGFV are even worse than so-called Zombie companies, in the sense that they could not pay the interest, not (to) mention the principal on their own," Larry Hu, chief China economist at Macquarie, said in a June 25 note. Bonds issued by such firms have been surging amid an infrastructure push as the Chinese economy improved. These companies are usually wholly owned by local and regional governments in China, and were set up to fund public infrastructure projects. Personal Loans for 670 Credit Score or LowerĪ major milestone to counter the idea of implicit guarantee in China's market would be a default of a bond issued by a local government financing vehicles (LGFV). Personal Loans for 580 Credit Score or Lower Best Debt Consolidation Loans for Bad Credit
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