The biggest default in the world
Data: FactSet; Graphic: Axios Visuals
The monstrous debt crisis that absolutely did not cause disaster this week was that of Evergrande, the Chinese real estate giant.
Why is this important: Evergrande’s share price has slumped to pennies, its bonds anticipate default with a very limited recovery, and even its clients are protesting across China. But so far the wider repercussions have been minimal.
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Driving the news: Global markets fell Monday, fearing the Chinese markets would collapse Wednesday morning, when they reopened after a two-day holiday for the Mid-Autumn Festival. When Shanghai reopened on Wednesday, it ended the day higher rather than lower.
Between the lines: A OK with domestic bondholders, combined with the company’s deep political ties at the national and local levels, have combined to reassure investors that the Chinese government will limit the fallout.
Evergrande is the first big test of the global financial system – and in particular of the Chinese financial system – since the chaos caused by the March 2020 pandemic, when central banks around the world were forced to take unprecedented measures to prevent a total collapse. So far, global markets seem to be doing very well.
The context: By any measure, an Evergrande default is likely to be one of the biggest in the history of the world.
To put down his $ 305 billion debt in perspective, Argentina’s massive external debt default in 2001 was around $ 93 billion; Greece’s restructuring in 2012 was around $ 200 billion; and Lehman Brothers had about $ 600 billion in debt when it filed for bankruptcy.
These default values shook entire economies. Evergrande, on the other hand, appears to have been successfully contained.
Between the lines: Evergrande’s debt has always had a low junk rating, and the company was describe as “the greatest pyramid scheme the world has ever known” as long ago as 2017. As a result, investors in Evergrande, just like investors in bitcoin or GameStop, were keenly aware that they were taking a big risk.
The bottom line: It is normal and healthy for markets to fall when giant companies go bankrupt. The fact that Chinese markets have been so bullish this week implies the existence of some sort of “Xi put” – and the idea that Evergrande is, ultimately, too big to fail.
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