China’s total debt load has climbed to more than two and a half times the size of its economy, underscoring the difficult challenge facing Beijing as it seeks to spur growth without sowing the seeds of a financial crisis.
The total debt-to-gross domestic product ratio in the world’s second-largest economy reached 251 per cent at the end of June, up from just 147 per cent at the end of 2008, according to a new estimate from Standard Chartered bank.
Such a rapid build-up is far more of a concern than the absolute level of debt, since increases of that magnitude in such a short period have almost always been followed by financial turmoil in other economies.
While calculations of the ratio vary depending on exactly what types of credit are included, several other economists agreed with the new figure. Even those with slightly different calculations said the general trend was clear.
“China’s current level of debt is already very high by emerging markets standards and the few economies with higher debt ratios are all high-income ones,” said Chen Long, China economist at Gavekal Dragonomics, a research advisory. “In other words China has become indebted before it has become rich.” >> Read More
Fitch Ratings has affirmed Germany’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘AAA’ with Stable Outlooks. The issue ratings on Germany’s unsecured foreign and local currency bonds have also been affirmed at ‘AAA’. Fitch has also affirmed the Short-term foreign currency IDR at ‘F1+’ and Country Ceiling at ‘AAA’.
KEY RATING DRIVERS
The affirmation of Germany’s sovereign ratings reflects the following key rating drivers:
The general government debt to GDP ratio (GGGD) has already started falling in Germany, unlike its ‘AAA’ rated eurozone peers and France (AA+/Stable), UK (AA+/Stable) and the US (AAA/Stable). The debt ratio eased to 78.4% in 2013 from 81% in 2012. The outcome was slightly better than Fitch’s estimate of 79.4% and the improvement was partly driven by the winding-down of the portfolios of Germany’s two state-owned bad banks.
Germany continues to have the components of a declining public debt path. The economy is growing, the budget position is relatively favourable and nominal interest rates are low. The downward trajectory of GGGD improves the shock-absorbing capacity of the sovereign. Furthermore, while the debt ratio remains elevated compared with the ‘AAA’ median of 45% and ‘AA’ median 37%, it is within the range considered by Fitch to be consistent with a ‘AAA’ rating for a sovereign with otherwise strong credit fundamentals. The government’s targets to reduce public debt to below 70% of GDP by 2017 and to less than 60% within ten years are plausible. >> Read More
Eurozone leaders continue to debate how best to reinvigorate economic growth, with French and Italian leaders now arguing that the eurozone’s rigid “fiscal compact” should be loosened. Meanwhile, the leaders of the eurozone’s northern member countries continue to push for more serious implementation of structural reform.
Ideally, both sides will get their way, but it is difficult to see an endgame that does not involve significant debt restructuring or rescheduling. The inability of Europe’s politicians to contemplate this scenario is placing a huge burden on the European Central Bank.
Although there are many explanations for the eurozone’s lagging recovery, it is clear that the overhang of both public and private debt looms large. The gross debts of households and financial institutions are higher today as a share of national income than they were before the financial crisis. Nonfinancial corporate debt has fallen only slightly. And government debt, of course, has risen sharply, owing to bank bailouts and a sharp, recession-fueled decline in tax revenues.
Yes, Europe is also wrestling with an aging population. Southern eurozone countries such as Italy and Spain have suffered from rising competition with China in textiles and light manufacturing industries. But just as the pre-crisis credit boom masked underlying structural problems, post-crisis credit constraints have greatly amplified the downturn.
True, German growth owes much to the country’s willingness a decade ago to engage in painful economic reforms, especially of labor-market rules. Today, Germany appears to have full employment and above-trend growth. German leaders believe, with some justification, that if France and Italy were to adopt similar reforms, the changes would work wonders for their economies’ long-term growth. >> Read More
Mario Draghi’s plan to end the euro area’s lending drought risks missing the target.
While the European Central Bank president says a program to hand as much as 1 trillion euros ($1.4 trillion) to banks has built-in incentives to spur lending to the real economy, analysts from Barclays Plc to Commerzbank AG have doubts on how well it will work. In fact, the measure allows banks to borrow cheaply from the ECB even without increasing credit supply.
Draghi has identified weak lending as an obstacle to the euro area’s recovery and is committed to reversing a slump that has eroded more than 600 billion euros in loans to companies and households since 2009. The risk is that if the latest plan fails, the currency bloc slips closer to deflation and to the need for more radical action such as quantitative easing.
“It’s not the silver bullet,” said Philippe Gudin, chief European economist at Barclays in Paris. “Every incentive for banks to lend is a good thing, but I wouldn’t say I’m reassured that credit will pick up.” >> Read More
British brokerage RBS on Wednesday said Indian corporates will have to arrange $1.52 billion funds in foreign exchange in the current calendar year to refinance their debt, which will jump to $2.3 billion next year and to $9.1 billion in 2016.
“The high number of callable/maturing dollar bonds in the next five years point to major re-financing opportunities, which we see at $1.52 billion this calendar year, $2.3 billion next year and $9.1 billion in 2016,” RBS India and SE Asia managing director and head of debt capital markets Manmohan Singh said in Mumbai.
However, the fresh funds for refinancing will drop to $3.5 billion in 2017 but rise to $8.87 billion the next year and again fall to $7.55 billion in 2019, he said.
On the outlook for fresh fund-raising by domestic corporates, Mr Singh said given the benign interest rate environment in the West, especially in the EU, fund mopping up will take place in the second half of 2014. >> Read More
Fitch Ratings has affirmed France’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘AA+’. The Outlooks are Stable. The issue ratings on France’s unsecured foreign and local currency bonds have also been affirmed at ‘AA+’. At the same time, the agency has affirmed France’s Short-term foreign currency IDR at ‘F1+’ and the Country Ceiling at ‘AAA’.
KEY RATING DRIVERS
The affirmation and Stable Outlooks reflect the following factors:
France’s budget deficit improved by 0.6ppt to 4.3% of GDP in 2013, although this was slightly worse than the 4.1% target presented in the 2014 draft budget in October. Fitch no longer forecasts the French government will meet the EU threshold for the general government fiscal deficit of 3% of GDP by 2015, but any slippage will be modest. The government has provided more detail on its consolidation measures, in particular on the EUR50bn planned expenditure cuts (relative to prior rising trends) from 2015 to 2017, and the recent June supplementary budget detailed an extra EUR4bn of spending savings this year and additional tax relief to households than announced originally. However, the consolidation plans are unprecedented in recent times and meeting expenditure targets will be challenging. >> Read More
Fitch Ratings has affirmed the United Kingdom’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘AA+’. The Outlooks are Stable. The issue ratings on the UK’s senior unsecured foreign and local currency bonds have also been affirmed at ‘AA+’. The Country Ceiling has been affirmed at ‘AAA’ and the Short-term foreign currency IDR at ‘F1+’.
KEY RATING DRIVERS
Favourable macroeconomic trends, including strong GDP growth, falling unemployment and inflation close to the 2% target, have continued in the UK economy since our last review in December 2013. Quarterly GDP growth has been strong, on average 0.8% qoq, since 2Q13, the least volatile among the major advanced economies. Fitch judges growth to be partly cyclical, reflecting the gradual closing of the previous large output gap.
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