Samson: An economic crisis may affect five of the world’s largest economies

18th August 2019

Face 5 of the world ‘s largest economies are currently at risk of exposure to
the economic crisis may occur does not require a lot. 

The UK economy shrank in the second quarter and growth stagnated in Italy, while data
published on Wednesday showed that the German economy, the world’s fourth
largest, contracted in the three months before June.

Mexico has evaded an economic recession, which is usually two consecutive
quarters of deflation, and the country’s economy is expected to remain weak
this year, while data suggest that Brazil experienced a recession in the second
quarter.  Germany, Britain, Italy, Brazil and Mexico are among the top 20
economies in the world. 

Singapore and Hong Kong, both smaller but of global commercial significance, also suffer. Although economic growth has been declining in each country due to a combination of
determinants, the global industrial recession and sharp decline in business
have made matters worse. 

The Chinese economy is facing the slowest growth in nearly three decades, with the country experiencing a long-term trade war with the United States, which plans to impose new taxes on Chinese exports in September and December.

The International Monetary Fund last month cut its forecast for global economic growth this year to 3.2%, the weakest expansion since 2009, while cutting its forecast for 2020 to 3.5%.  These indices have caused growing concern among investors as the bond market is not promising, with more than a third of asset managers surveyed by Bank of America forecasting a global recession in the next 12 months. Neil Schering, chief economist at Capital Economics, says he sees no clear justification for the gloomy recession. Corporate spending on assets, such as equipment, has stabilized globally and the labor market is flexible, he said. 

However, Schering also points to some of the major risks that have
affected the economy recently. First, the trade war between Beijing and
Washington says that if Beijing and Washington continue to escalate tensions,
it could affect corporate confidence. The International Monetary Fund has
warned that growth in 2020 will halve if the conflict intensifies.

Another big risk is that central banks will fail to act, causing a negative reaction in financial markets that feed on the real economy. The US Federal Reserve cut interest rates last month for the first time in 11 years, while pressure is growing on China to cut its key interest rate for the first time in four years. Other central banks from India to Thailand have also cut interest rates, and further cuts are expected.  LINK

Don961:  Declining banks’ dominance of the debt market threatens a violent global crisis

 17 August 2019 05:08 PM

Edit: Noha

Some investors worry that the build-up of huge global debt since the financial crisis a decade ago cannot be sustainable

Indeed, an analysis published by Bloomberg Openion suggests that in reality large debt can
be sustained for a longer period, but only in accordance with the risk of a
more severe correction in the future

This comes with the fact that this credit cycle may not be typical, as politics is driving
the current expansion

Governments and central banks have encouraged debt-led consumption and investment to
stimulate economic growth.

Ample liquidity, central bank purchases of debt and zero or negative interest rates have allowed high debt levels to be sustainable and servicing costs can be paid

Great changes

These policies fundamentally change the mechanisms of credit markets. For example, with
negative interest rates, borrowers can default if they fail to repay only the
principal amount, because the interest payments required are small or

In Japan, poor profitability from negative interest rates has discouraged banks from trying to
collect bad debts, instead relying on negative benefits to allow bankruptcy
companies to continue working by providing them with loans

Signs of the debt plight include deteriorating credit quality, poor debt servicing and an
increase in the number of non-performing loans, which are of little concern at

Banks are less important now

At the same time, the less interesting shift in credit markets should serve as warning whistles, as banks have become less important as a debt provider since 2008, reflecting increased capital requirements and declining leverage within the banking sector

Investors have replaced banks not only with traditional debt providers
such as insurance companies and pension funds, but with new participants such
as investment funds, ETFs, hedge funds and foreign investors

For example, ETF holdings of corporate bonds have doubled since 2009 to
about 20 percent of total bonds offered

The share of US banks in leverage debt has fallen to about 8 percent,
while collateralised loan commitments, managed by specialized fund managers,
have increased by about 60 percent of total issuances

Foreign investors currently hold about 30 percent of the US corporate
bond market

High investor contributions to bond markets threaten to make any downward spiral more
aggravated, as investors do not have enough capital to mitigate losses.

Unlike cases where the bank is the lender, the losses will be passed on immediately to the end investors, accelerating the impact of any deterioration in credit conditions

Moreover, many mutual funds operate with a mismatch between assets and liabilities, and
investors can redeem the bond in a short period of time, but the fund’s assets
usually include a long-term portfolio

The problem is exacerbated because the search for returns has encouraged funds to invest in a higher risk environment and less liquid assets, from which they may not be able
to make enough quick profits to meet the redemption process

Another problem arises when investments are financed by leverage loans, where if asset values fall, funds may have to sell long-term, often illiquid assets to cover the cost
of margin buying

These funds generally have limited liquidity reserves to withdraw from them instead. Unlike
banks, they do not have access to the lender of last resort facilities

Investors are pursuing rules-based strategies, and downgrades often exceed the prescribed
limits or a significant drop in prices often cause the fund to be liquidated or
affect operation

Most corporate debts currently range from a credit rating of BBB or higher, or a
non-investment grade of BB or below

The share of investment grade debt ( BBB ) has increased almost four times its size since 2009, and any reduction will result in forced selling as investors limited to investment grade bonds will need to exit

Banks with loans to maturity are less affected by such changes

High participation by foreign investors poses different problems, and they will likely need to
suddenly adjust their investment in response to currency fluctuations and
higher foreign currency hedging costs, as well as a downgrade

The gravity of the next crisis

Ultimately, investors are ineligible to deal with financial crises. Banks can work with
borrowers, restructure liabilities, or convert loans into equity to minimize

In contrast, many investors will sometimes be forced to sell their holdings at undervalued prices

Regulators and markets have taken steps to strengthen the banking system since the global
crisis, but the problem is that in any future credit downturn, the tools to
curb the crisis that banks can apply will have less impact than before, which
will increase volatility and exacerbate any future financial crisis

In order to address declining investor demand and potential forced selling, policymakers need to increase their market intervention by imposing minimum capital and liquidity
reserves, such as those applied to banks

If they don’t, they risk using public funds to bail out investors to prevent a major financial

The dilemma illustrates a fundamental aspect of the markets: risk never
disappears, it only moves to the least regulated angle you can
find     link


    |   Category: KTFA