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Evergrande Misses Debt Payments Due Monday As World’s Richest Banker Says China’s “Lehman Moment” Has Arrived
Evergrande Misses Debt Payments Due Monday As World’s Richest Banker Says China’s “Lehman Moment” Has Arrived
Wall Street analysts have been churning out commentary this week proclaiming that while Evergrande’s troubles pose a serious threat to the Chinese economy, it’s potential collapse doesn’t represent a “Lehman Moment”. As Thursday’s bond-interest deadline looms, analysts at Mizuho write that “while street wisdom is that Evergrande is not a ‘Lehman risk’, it is by no stretch of the imagination any meaningful comfort…It could end up being China’s proverbial house of cards … with cross-sector headwinds already felt in materials/commodities.”
We touched on this earlier, with analysts at SocGen raising the odds of a “hard landing” – an “extended, severe property-led slowdown” – to 30%.
The FT, meanwhile, shared Barclays’ skeptical take on the Lehman scenario comparisons, arguing that Evergrande has little in common with the Lehman scenario aside from the timing (Lehman famously filed for bankruptcy in September 2008, 13 years ago.
“China’s situation is very different. Not only are the property sectors’ linkages to the financial system not on the same scale as a large investment bank, but the debt capital markets are not the only, or even the primary, means of funding. The country is, to a large extent, a command-and-control economy. In an extreme scenario, even if capital markets are shut to all Chinese property firms (which is not occurring and is only a tail risk at this point), regulators could direct banks to lend to such firms, keeping them afloat and providing time for an extended ‘work-out’ if needed. The only way to get a widespread lenders’ strike in a strategically important part of the economy would be if there were a policy mistake, where the authorities allow the chips to fall where they may (perhaps to impose market discipline), regardless of the systemic implications…
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Why We Won’t Have a “Lehman Moment” in the 2016 Crash
Why We Won’t Have a “Lehman Moment” in the 2016 Crash
What the central banks cannot do is create productive places to invest the credit they’ve generated in such excess, or force qualified borrowers to swallow more unproductive debt.
One way to lose a war is to focus on preparing to fight the last war. Preparing to fight the last war is a characteristic of losing generals, militaries and nations. The same is true of finance and economies.
General Grant’s difficulties in breaking the trench warfare around Petersburg, VA in the last year of the American Civil War (1864 to early 1865) telegraphed the future of trench warfare to astute observers. Few took heed of the lessons of the “first modern war,” and many of the same strategies of 1864 (digging a tunnel under enemy lines and filling the tunnel with explosives to blow a hole through their defenses, for example) were repeated in the Great War of 1914-1918 fifty years later.
When a weapon system capable of breaking the stalemate emerged–the tank–its potential for massed attack escaped planners on both sides, and the new weapon was squandered in piecemeal assaults.
“The last war” in 2008-09 was a battle to save heavily leveraged centralized financial institutions from default and liquidation–commercial and investment banks, insurance companies, etc. The concentration of capital, leverage and risk in these behemoths rendered the entire system vulnerable to their collapse (or so we were told).
Saving imploding private-sector banks was no problem for central banks that could create $1 trillion in new money with the push of a button and offer essentially unlimited lines of credit to banks facing a liquidity crunch.
But the current financial meltdown is not like the last war. Central banks are ready to extend unlimited credit again to private-sector financial institutions, but this time around, the problem won’t be a lack of liquidity.
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