Charlene Chu, the superstar Fitch Ratings analyst known for her bearish views, has just released a report saying there is “no deleveraging in sight” for China’s credit boom.
The nine-page report says Fitch’s broad measure of new credit hit CNY21tn in August, from CNY19tn in 2012, marking the fifth year that net new credit will exceed one-third of GDP.
It is difficult to see how a situation in which credit – already twice as large as GDP – continues to grow by twice as fast can be sustainable indefinitely. Nonetheless, there appears to be no immediate constraints to prevent this divergence from continuing.
Rising debts don’t necessarily pose a problem when the pace of growth is climbing, as borrowers can easily roll over their loans. But when growth shrinks and financial conditions tighten, servicing debt can become problematic and lead to defaults or a crisis.
Nomura warned three months ago that Asia had entered a “high-risk danger zone.”
Ms Chu, who has one of the highest estimates for the country’s debt pile, writes:
a positive case – in which credit growth slows by 2pp annually to 12% while nominal GDP growth holds at 11% – pushes credit/GDP near 250% by end-2017 (2008: 130%). More realistic scenarios result in ratios above 270% by end-2017.
Other alarming stats from the report (abridged and edited):
Interest owed by borrowers is substantial and climbing, rising from 7% of GDP in 2008 to 12.5% in 2013. By 2017, this will rise to 16 – 22%. Read More
Detroit may file for Chapter 9 bankruptcy protection as soon as Friday, setting up what would become the largest municipal insolvency in U.S. history, the Detroit Free Press reported Thursday.
The home of the nation’s resurgent auto industry has as much as $20 billion in debts and liabilities, dwarfing previous city and county filings.
The city’s hometown paper said the filing would set off a 30 to 90-day period “that will determine whether the city is eligible for Chapter 9 protection and define how many claimants might compete for the limited settlement resources that Detroit has to offer.”
The Detroit Free Press said Gov. Rick Snyder would need to sign off on the deal. It said his office did not return phone calls immediately for comment.
Athens has been in talks with inspectors from the European Union, European Central Bank and International Monetary Fund “Troika” for nearly a week to show it can deliver on its pledges, after failing to meet public-sector reform targets.
Greece hopes eurozone finance ministers will free up its next €8.1bn (£7bn) tranche of aid on Monday morning because it needs part of the money to redeem about €2.2bn of bonds next month. The latest loan instalment is one of the last big cash injections that Greece stands to get as part of a €240bn rescue package that expires at the end of 2014.
The moves coincided with news that more than two thirds of the amount Greece is owed in back taxes by its citizens will probably never be recovered.
The country’s new senior tax collector, Haris Theoharis, told The Daily Telegraph that up to €42bn in taxes and other monies owed to the state would have to be written off as “uncollectable”. The debts are due to the failure of successive Greek administrations to enforce tax collection properly, and have played a significant part in the Greek government’s financial meltdown. Most of it is owed by companies or individuals who are variously defunct, deceased, bankrupt or otherwise unlikely to be able to pay. Read More
Ireland, Greece and Portugal are labouring under debt-to-income ratios of more than 300%, according to figures that expose the indebtedness of eurozone governments in relation to their government revenues.
The measure, intended to show governments’ abilities to pay debts, shows Ireland’s total debt in 2012 was €192bn (£163.1bn), or 340% of the government’s income. Ireland came a narrow second in the table to fellow bail-out recipient Greece, which has amassed an even worse debt-to-revenue total of 351%. Portugal – which has also received aid from the troika of the International Monetary Fund, the European commission and the European Central Bank – came third with a debt-to-revenue ratio of 302%, while Britain was sixth last year on the list of 27 European Unionmember states, with a debt-to-revenue ratio of 212%, according to calculations based on European commission figures.
Debt figures are usually calculated as a ratio of a country’s national income and expressed as a proportion of GDP. But national income figures reflect activity across the whole economy, in both the public and private sectors. governments must pay debts from tax receipts and other government income, not the income for the economy as a whole. Some analysts argue a government’s debt-to-revenue ratio provides a clearer picture of its ability to fund annual debt payments once interest rates are taken into account. Read More
-A total of 52% of listed Japanese companies, excluding financial institutions, were debt-free as of the end of fiscal 2012, marking the first time the figure has topped 50% since firms were required to adopt consolidated accounting rules fiscal 2000.
Automakers and companies heavily reliant on domestic demand have been using their remarkable earnings recoveries to pay off their debts so as to better buffer themselves against disasters, such as the kind seen with the collapse of Lehman Brothers and the Great East Japan Earthquake. Their focus now is on how to best use their rich cash reserves to promote growth.
The figure was obtained by comparing the cash reserves, including cash and short-term securities holdings, and interest-bearing debts of listed firms for fiscal 2012. Read More
And there it is folks. The age of austerity is over.
In an interview given on Sunday, French Finance Minister Pierre Moscovici said: “Austerity is over, but we remain serious,” according to Reuters.
The “we remain serious” part seems to refer to the country’s dedication to hit deficit targets. But those targets have been loosened, Moscovici obviously believes that Europe has reached an end of budget cutting for the sake of budget cutting.
There’s been an incredible collapse in the last month of the pro-austerity movement.
The UK has been rebuked by IMF officials. Reinhart and Rogoff have imploded publicly. Niall Ferguson stuck his foot in his mouth equating Keynes’s economic philosophy with his sexual orientation. Bill Gross has blasted the UK. The new Italian Prime Minister has said austerity is over.
The whole facade of trying to stimulate the economy (or even reduce debts) by cutting spending is collapsing.
In an interview, Soros praised China’s system of financial regulation
But warned that Beijing faces near term “exceptional difficulties” in its economic transition
Soros has an interesting view of China banking:
“The Chinese regulators have a much closer and more intimate knowledge of what goes on inside the banks,” he said. “The lack of detailed knowledge in the West is quite amazing. And that was the reason why things went so wrong”
Says its unlikely local governments will default on their debts
He cautioned investors to stay away from Chinese real estate in the short term
Good weekend reading, and important background information for AUD traders.