Charted by CreditSights last week, with no points for noting the commodity component of the defaults:
They add that “the US HY issuer-weighted default rate is approaching the historical average of 5.4%” and that “eight new defaults in April 2016 would put US HY default rates at the same level as the historical average. With 18 US HY defaults already taking place during 1Q16 this is entirely possible, although it is more likely that default rates will reach the historical average in May or June 2016.” Read more
China is growing at 6.7 per cent and broadly stabilising, “down slightly from the end of last year but comfortably within the government’s targeted range, as housing and infrastructure cushioned a slowdown from financial services.”
Well (and this is taking the GDP figure at face value) not if it’s just being propped up by the same old tools which led everyone to worry about its growth model in the first place.
Which it looks like is what’s happening… Read more
The credit cycle is long in the tooth by anyone’s reckoning — just how long in the tooth is a different question.
How about four-fifths of the way there? Read more
Jaime Caruana, the general manager of the Bank for International Settlements, and the former boss of the Bank of Spain, gave an important speech Friday, which, among other things, highlights the radically different frameworks economists use to evaluate what’s going on.
In textbook macro models, economies grow at some “trend” rate based on productivity on population growth, except when occasionally buffeted by “shocks” in different directions such as an oil price spike or a tax cut — shocks that fade in importance over time as economies “naturally” return to their “trend”. In these models, policymakers should focus on boosting productivity, which improves the trend path, and establishing institutions that smooth out the impact of the shocks when they occur by temporarily shifting resources to those most affected. Little else matters. Read more
Yup, amidst all the CNY/CNH spread stuff, this is what really counts.
From UBS, with our emphasis:
And here’s the thing – the factors that we believe have motivated the shift in currency regime [to a broader trade-weighted basket] are unlikely to change anytime soon. Weak international demand will likely keep a lid on export growth. Most importantly, lest we miss the woods for the trees, let’s remind ourselves that China’s key issue is that it is levering up almost at the same pace as it was 5 years back, when investors first started worrying about credit misallocation (Figure 8). The more levered the economy, the less effective countercyclical monetary will be. Clearly, then, all growth enhancing options need to be on the table. From a 2-3 year perspective, we do believe that the CNY can be considerably weaker than what forwards are implying.
From Deutsche, there are worse ways to sum up this year in credit…
Late stages of every credit cycle, by definition, are built on a theory as to why this time is different.
This type of attitude was prevalent going into 2015, when credit markets largely dismissed the oil sector distress, choosing to believe that this was an isolated issue and will stay that way. Historical evidence pointed to the contrary, where no earlier precedents existed of the largest sector being in distress and the rest of the market remaining firm. Today, two out of three sectors in US HY have more than 10% of debt trading at distressed levels.
Or, charted: Read more
AB InBev – SABMiller
Dell – EMC (Per CreditSights: “We believe that Dell has signed up to do the unthinkable – raise about $40 billion of debt”)
x – Sandisk (supposedly)
Maxim – Analog Devices (supposedly)
All of that action has lead UBS’s Matthew Mish and Stephen Caprio to ask if debt markets are reaching full capacity in this late stage of the credit cycle (with our emphasis): Read more
According to Nomura’s Nordvig and team “the EM [FX] debt bonanza is over”.
Which is nice if you thought it was a measure of building risk…
After three years (2012-2014) of very strong net issuance in emerging markets (around $250bn per year), issuance has dropped to much lower levels during 2015. Chinese entities managed to issue around $50bn in debt, mostly in the early part of the year, but net issuance in other emerging markets has essentially ground to a halt.
Or, in chart form via Investec… Read more
In the event of a new downturn please press the giant red button. To do so please break through the glass emblazoned with the words “political reality”.
What to do if the world turns sour is, of course, a fair question. And one that Andy Haldane recently tackled while discussing 5000 years of dread, the record low interest rates and stretched central bank balance sheets, we are currently seeing.
Citi are starting to point to a new global recession too, triggered by EM and a stumbling China. We’re not sure we buy that just yet but here’s Citi’s Englander with what he think is coming down the policy path in response, with our emphasis:
We now think that the move to central banks endorsing fiscal policy and essentially monetizing the added spending will be relatively quick and direct, in the event of a sudden slump in the global activity.
UK chancellor George Osborne has announced new budgetary rules that aim to eliminate the current structural deficit within three years and ensure public sector net debt is falling as a share of national income by 2016-17.
Key to the new vision is a budget surplus by 2017-18.
But as the FT’s Martin Wolf warns on Friday:
…the focus on public debt alone is mistaken. Crucially, it ignores the asset side of the balance sheet altogether. Moreover, other things being equal, the bigger the fiscal surplus, the lower interest rates would be. If that encouraged a run-up of private debt, the economy might end up yet more unstable. Alas, the Office for Budget Responsibility already forecasts a big jump in household debt.
Consider this from Gavekal’s Chen Long. If nothing else, it puts China’s local government debt restructuring in context:
Of course, that context also involves noting the restructuring’s potential to get a whole load bigger. Which then demands we put that in its own context of China’s general plan to deal with its debt load and, eventually, note that what China means by capital account liberalisation mightn’t be quite what everyone else means by capital account liberalisation. Read more
The most recent US downturn was so painful because US households’ borrowing binge in the first half of the 2000s left them stuck repaying large debts (often against assets that had plunged in value) and unable to spend money on new goods and services that they actually wanted. Moreover, they weren’t in a position to take out new to debt to support consumption as they had before the crisis.
A fascinating new paper by Xavier Giroud and Holger Mueller argues that many US companies went through a similar experience, and that this made the downturn about twice as worse as it otherwise would have been. Read more
From Goldman’s economics team, a half-century of debt buildups and Japanese domination:
Basically, a chart to launch a thousand arguments (comparing Italy, Greece and Japan being a good starting point) which you should definitely click and enlarge. Read more
“Chinese lenders were overzealous in funding domestic boondoggles since 2008″ has almost become a mainstream opinion, thanks in part to charts like this:
Since 2008, debts owed by China’s nonfinancial sector have soared by more than 90 percentage points relative to GDP. As David said, that’s “pretty damn fast.”
Almost all of that increase can be attributed to corporate borrowers. Chart via Goldman:
Iren Levina, economics lecturer at Kingston University, brings to our attention a fascinating, if under-appreciated, phenomenon in finance.
She describes this as the “puzzling rise in financial profits and the role of capital gain-like revenues” throughout most of the 2000s, which were totally delinked from real economic growth during the period.
Okay. Why so puzzling you ask? Don’t we know these profits were the result of too much risk taking? And haven’t there been hundreds of papers about this sort of thing?
Well, yes. But this isn’t quite Levina’s argument.
In a paper published in April this year she instead argues that the reason financial profits became disassociated from real economic growth was because of the way they were formed and the way they were transferred through the financial system consequently.
More to the point, because they were enabled by the very phenomenon of “capital gain-like revenues’.
Unfortunately, the monetary assets which facilitated these revenues have been incorrectly understood by the financial system. In Levina’s eyes they are not, as many believe, borrower liabilities matched by real assets at financial institutions, but rather borrower liabilities matched by something altogether different. Read more
Just when you think there’s nothing left to say about China’s debt dilemma up pop some more pieces to greet the new year. Two of the most recent saw Soros on the self-contradiction in Chinese policy boat saying that “restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years” and Patrick Chovanec providing a touch more detail about what all that messy debt actually means:
To those who wrote off China’s first banking seizure in June as a fluke, this latest episode [interbank lending market spiked to near 10 percent again last week] appeared to come out of nowhere. They cast about for explanations: Perhaps some seasonal surge in cash withdrawals was to blame, or the U.S. Federal Reserve’s decision to taper its bond-buying policy. Optimists assumed the PBOC was tightening credit on purpose, as a warning to banks to rein in unsafe lending practices. With inflation at manageable levels, they reasoned, the People’s Bank of China had plenty of room to loosen monetary policy again and ease the cash crunch.
China says rollover. From the FT’s Simon Rabinovitch:
Faced with a mountain of maturing loans this year, China has given local governments the go-ahead to issue bonds as a way of rolling over their debt to avoid defaults.
The announcement by the National Development and Reform Commission, a top central planning authority, is the most explicit official endorsement of a massive debt refinancing operation that has become unavoidable and is already under way, analysts said.
(Title credit to Anne Stevenson-Yang of J-Capital, who kindly insisted we steal what we would have stolen anyway.)
Brushing aside the obvious points that Xi is ‘Deng II, the Reformer’ and that his third plenum will be a knockout success similar to the big man’s in 1978, let’s pretend there’s a chance it might go wrong. Read more
SIV/ LGFV/ LGIV/ *shrug*
Whatever you choose to call the vehicles China’s local governments used to fund infrastructure when Beijing restricted financing (we are going with LGFVs here) they are very near the centre of Chinese debt fears. Which means it’d be nice to know how big they really are.
From Stephen Green at Standard Chartered (our emphasis): Read more
Ok, we’ve been slow to get this up. That’s because…
But here, belatedly, is a paper from Achim Dübel of Finpolconsult: Creditor Participation in Banking Crisis in the Eurozone – A Corner Turned? Read more
The following is a guest post from Chris Cook, a senior research fellow at the Institute for Security and Resilience Studies at University College London. His work is focused on a new generation of networked markets – which will, in Chris’s view, necessarily be dis-intermediated, open, decentralised and, therefore, resilient.
The second attempt to resolve the unsustainable debt burden of Cyprus’s over-leveraged banks spreads the pain differently to the disastrous initial attempt, but looks likely to leave Cyprus as an economic wasteland for generations. Frances Coppola outlined brilliantly yesterday the sort of financial disaster zone which Cypriots can expect. Read more
Paul Krugman has penned a rather wonderful explainer on the economics of Google Reader, and why it makes economic sense for Google to shut down a much-loved service like Reader even if people say they are prepared to pay for it.
Krugman actually picks up where Ryan Avent left off, but the following paragraph does a good job of nailing the problem:
Basically, if the monopolist tries to charge a price corresponding to the value intense users place on the good, it won’t attract enough low-intensity users to cover its fixed costs; if it charges a low price to bring in the low-intensity user, it fails to capture enough of the surplus of high-intensity users, and again can’t cover its fixed costs.
US Treasuries are kicking up with the 10 year threatening to push through 2 per cent for the first time in quite a while. It’s a little bit of economic optimism — better data means more chances of Fed tightening.
Capital Economics did the needful and put voice to the idea that the bull rally in Treasuries might have further to run for all sorts of not very contrarian reasons (our emphasis): Read more
We’ve run a couple of posts here on FTAV recently about how cancellation of QE debt isn’t really such a big deal: more an accounting change than anything material because both treasuries and central banks are part of the public sector.
Here is an argument that this mere accounting exercise could be worthwhile — particularly if the debt-laden developed countries descend into another downturn. Read more
Hat-tip to the FT’s Brussels blog…
Click t0 enlarge — a Eurogroup chart guide on how to cut Greece’s official debt levels (a buyback boondoggle included): Read more
So, we’re going to the wire once again in the now traditional dance between Greece and the troika. As the FT reported on Thursday:
Eurozone leaders face a new round of brinkmanship over Greece’s €174bn bailout after international lenders failed to bridge differences on how to reduce Athens’ burgeoning debt levels, pushing the country perilously close to defaulting on a €5bn debt payment due next week.
Greece’s new budget was announced on Wednesday. With it came projections for the country’s economic health. The patient is not well. Even before the government’s own-self assessment of conditions, revisions by the IMF alone revealed the deterioration, as Exotix’s Gabriel Sterne points out in a note on Thursday. More of his analysis further down, but first this from the FT on the Greek government’s figures: Read more