You probably remember the name Evergrande from late September 2021, when the Chinese real estate giant nearly missed an $83 billion bond interest payment on more than $300 billion in debt. The announcement that Evergrande risked missing this payment sparked a selloff of the company’s stock, corresponding with a 2% single-day drop in U.S. markets. Back then, the mere idea that Evergrande could default on its debt was enough to send ripples around the world, but what would happen if they did miss an interest payment?
We may have an opportunity to find out. On Thursday, December 9th, credit rating agency Fitch declared that Evergrande was in default. Earlier that week, the company was scheduled to repay $82.5 million in interest on $1.2 billion in international loans; by December 8th, their creditors had not received the money. Representatives from Fitch received no response as they attempted to confirm whether the payments were made, spooking investors all around the world. On Friday, December 10th, Evergrande released a statement, saying that they could not guarantee “to perform its financial obligations.” This caused shareholders to dump their shares of the company and the company’s stock price has experienced a steady decline.
While the global effect of Evergrande’s actual default was less dramatic than what occurred in September, that may be due to international investors limiting their exposure to the company and others in similar debt situations. On December 15th, Reuters reported that Chinese authorities were carefully scrutinizing Evergrande’s assets, but that there were no concrete plans to liquidate the company. The Chinese government reassured investors that it would take measures to stabilize Evergrande, indicating that they may be looking to bail out the indebted megacorporation. Doing so could increase China’s national debt, which has steadily risen since 2011. At present time, Beijing officials are left with two options: Let Evergrande fail and potentially tank the global economy or bail out the struggling company and increase their national debt. Investors all over the world will be monitoring the situation closely which will likely cause massive swings of volatility at the first sign of trouble.
Debt Crises around the World
The idea that the Chinese government may become heavily involved in bailing out Evergrande raises the possibility of a debt crisis that could threaten the stability of the global economy. Of course, China is not the only country facing a debt crisis; the United States and many other nations are saddled with seemingly insurmountable levels of debt. Congress has narrowly avoided default numerous times in recent years by raising or suspending the debt ceiling, but each time the issue rightfully makes investors nervous. While Congress approved a $2.5 trillion increase in the borrowing limit on December 15th, this increase only pushes the issue down the road into 2022, creating another debt ceiling battle after the midterm elections in November.
In addition to the United States’ debt issues, the Jubilee Debt Campaign estimates that another 52 countries are currently in financial trouble, while another 23 are at risk of a public or private debt crisis. Countries like Greece, Ghana, Haiti, Pakistan, and even the United Kingdom could potentially default on their debt at any time. If multiple defaults were to occur simultaneously, it could create a protracted global recession like the global crisis witnessed in the early 1980s. Back then, much of the world experienced economic contraction and double-digit inflation that lasted more than 3 years.
For those invested in the securities market (including stocks, bonds, mutual funds, and more) a global recession would cause significant losses in the value of your retirement savings. When the stock market crashed in 2008 and again in 2020, millions of investors lost a sizable portion on their nest eggs, and many of those who experienced losses were never able to recover. Another crash, especially one so soon after the COVID-19 crash, could mean that Americans in or near retirement will have to change their plans, delay retirement, or accept a lower standard of living in their golden years—potentially even settling for a combination of all three.
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