Kaisa, the Chinese real estate developer that rattled Asian financial markets when itdefaulted on a bank loan at the turn of the year, has failed to make scheduled repayments to international bondholders amid a downturn in China’s economy and the country’s housing market.
The group, based in the factory hub of Shenzhen near the Hong Kong border, admitted it had failed to meet payments that had come due on March 18 on its bonds that are due in 2017 and 2018.
The missed payments were worth a total of $51.6m.
Before Kaisa defaulted on its bank loan, Kaisa’s chairman and major shareholder Kwok Shing Ying left the business. And just before his resignation, the company said authorities in the factory hub of Shenzhen, near the Hong Kong border, had restricted most of its operations in that city, which contributes about a fifth of the company’s sales. Kaisa offered no explanation for the sudden clampdown. >> Read More
As a reminder, China is allowing local governments to refinance a portion of their ~17 trillion yuan debt pile by swapping it for lower yielding bonds. As a percentage of GDP, local government debt has grown to 35% and because a sizeable amount was accumulated off balance sheet via shadow banking channels, it carries relatively high interest rates.
The pilot program will allow for the refinancing of around 1 trillion of that debt, a move which could save local governments some 50 billion yuan in interest payments. As a reminder, here’s what the local government debt picture looks like in China:
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China’s central bank is considering taking a page from Europe’s financial-crisis handbook to free up more credit as growth in the world’s second-largest economy slows.
The proposed strategy would allow Chinese banks to swap local-government bailout bonds for cash as a way to bolster liquidity and boost lending, said people familiar with the People’s Bank of China talks.
Adopting the strategy would mark a major shift in the central bank’s money-supply policy and underscore the leadership’s deep concern about missing already lowered growth expectations.
In recent months, China’s leaders have directed the central bank to try to beef up bank lending and lower borrowing costs as the economy slows and capital leaves the country.
But a barrage of easing measures—including two interest-rate cuts since November—has had limited success. Instead of stimulating targeted areas of the economy, such as small businesses, they have helped companies already heavily in debt. >> Read More
India’s central bank is opposed to a proposal to allow overseas settlement of the nation’s sovereign debt because such a move could lead to higher currency volatility, people familiar with the matter said.
The Reserve Bank of India doesn’t favor the settlement of rupee bonds on Euroclear Bank SA or Clearstream Banking SA platforms, but wants foreigners to engage local custodians or depositories instead, the people said, asking not to be named as they aren’t authorized to speak to the media.
The government on its part wants to make rupee debt eligible for such platforms as India relies on foreign investment to help fund its current-account deficit.
Settlement abroad will help provide global investors direct access to buying and selling the notes, sidestepping brokers and their fees. RBI Governor Raghuram Rajan had in October indicated that policy makers are in talks with institutions like Euroclear to see that actual trades happen in India while investors can work through a front elsewhere. >> Read More
Fitch Ratings has affirmed the United States’ Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘AAA’. Fitch has also affirmed the issue ratings on the United States’ senior unsecured foreign and local currency bonds at ‘AAA’. The Rating Outlooks on the Long-term IDRs are Stable. Fitch affirms the Country Ceiling at ‘AAA’ and the Short-term foreign currency IDR at ‘F1+’.
KEY RATING DRIVERS
The U.S.’s ‘AAA’ rating is underpinned by the sovereign’s unparalleled financing flexibility as the issuer of the world’s pre-eminent reserve currency and benchmark fixed-income asset, and as home to the world’s deepest and most liquid capital markets.
The federal government deficit is expected to narrow further in 2015 and 2016 from the 2.8% of GDP recorded in 2014. The medium-term deficit outlook has improved slightly on a combination of economic strength and lower than expected interest rates. Healthcare cost inflation has also slowed. However, without reforms to mandatory spending and/or taxation, the deficit will rise again from 2018. >> Read More
As the Ukrainian government and bondholders square up over a restructuring of the former’s debt, the country’s credit rating has been cut further into junk.
Kiev’s rating was lowered to ‘CC’ from ‘CCC-,’ by Standard & Poor’s on Friday, as the agency concluded that “a default on foreign currency central government debt is a virtual certainty.”
The government has said it plans to find about $15bn of debt relief, warning bondholders that this could include reductions in principals as well as lower interest payments and extended repayment schedules.
Fitch Ratings has revised the Rating Outlook on Brazil’s Long-term foreign and local currency Issuer Default Ratings (IDRs) to Negative from Stable and affirmed the IDRs at ‘BBB’. The issue ratings on Brazil’s senior unsecured foreign and local currency bonds are also affirmed at ‘BBB’. The Country Ceiling is affirmed at ‘BBB+’ and the Short-term foreign currency IDR at ‘F2′.
KEY RATING DRIVERS
The revision of the Outlook to Negative reflects the following key factors:
Brazil’s continued economic underperformance, increased macroeconomic imbalances, deterioration of fiscal accounts and a material increase in government indebtedness are increasing downward pressure on the sovereign credit profile. While the government has begun a macroeconomic adjustment process to boost policy credibility and confidence, downside risks related to its effective implementation and durability persist, especially in the context of a challenging economic and political environment. Additional domestic and external shocks could undermine the pace and scope of the adjustment process.
The Brazilian economy grew by a mere 0.1% in 2014 and is forecast to contract by 1% in 2015. Brazil’s three-year growth average of only 1.5%, compared to the ‘BBB’ median of 3.2%, highlights the structural nature of the under-performance. The macroeconomic adjustment process currently underway, if effectively implemented, could lead to a revival in confidence and growth in 2016 and beyond but growth will likely remain below that of rating peers. Medium-term growth prospects would largely depend on the government’s ability to reverse the downshift in confidence and improve the competitiveness of the economy by making progress on microeconomic reforms. >> Read More
India’s external debt at the end of December 2014 rose to $461.9 billion, up $15.5 billion from March 2014. Here’s the good news first: As a percentage of gross domestic product, the debt is 23.2%, a 50 basis point decline from nine months earlier. But the increase was tempered by valuation gains of $14.4 billion. That means but for these foreign exchange changes, the rise in external debt in the nine months to December would have been nearly $30 billion. The second piece of good news is that short-term debt declined to 18.5% of total external debt at end-December compared with 20.5% at the end of the previous fiscal year. The rise in total external debt has been fuelled by a private sector loan-raising spree. While government external debt has remained stable for some time now, private sector debt has increased steadily to hover around 19% of the country’s economic output.
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With a no longer “patient” Fed set for “liftoff” sometime this year, some observers (including IMF chief Christine Lagarde) are bracing for emerging market turbulence. A new paper from the Center for Global Development attempts to discern which EMs are most vulnerable to an “external shock” (be it geopolitical or financial) and also seeks to determine which countries are more prepared to weather a storm now than they were pre-crisis. According to the study, the relevant factors are 1) current account balance, 2) ratio of external debt to GDP, 3) ratio of short-term external debt to reserves, 4) fiscal balance to GDP, 5) government debt to GDP, 6) inflation versus targeted inflation, and 7) financial “fragility”.
From the study:
The values of the indicator for 2007 and 2014 are presented as well as the country rankings in both years. According to this methodology, the greater the value of the indicator the more resilient a country’s macroeconomic performance to external shocks is assessed to be.
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