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Toxic Pool of Bad Loans Threatens World Economy...


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#1 Rogerdodger

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Posted 03 February 2016 - 11:43 PM

Toxic Pool of Bad Loans Threatens World Economy...

 

Beneath the surface of the global financial system lurks a multitrillion-dollar problem that could sap the strength of large economies for years to come.

The problem is the giant, stagnant pool of loans that companies and people around the world are struggling to pay back. Bad debts have been a drag on economic activity ever since the financial crisis of 2008, but in recent months, the threat posed by an overhang of bad loans appears to be rising. China is the biggest source of worry. Some analysts estimate that China’s troubled credit could exceed $5 trillion, a staggering number that is equivalent to half the size of the country’s annual economic output.

But it’s not just China. Wherever governments and central banks unleashed aggressive stimulus policies in recent years, a toxic debt hangover has followed. In the United States, it took many months for mortgage defaults to fall after the most recent housing bust — and energy companies are struggling to pay off the cheap money that they borrowed to pile into the shale boom.

With China’s economy slipping, countries with significant exposure to raw materials, like Australia and Brazil, are facing serious headwinds. Germany exports machinery and automobiles to China, which had been a counterbalance to slow growth in Europe.

 

Click for interactive chart:

Change in the Shanghai composite index relative to the peak

 

http://www.nytimes.c...aps-charts.html


Edited by Rogerdodger, 03 February 2016 - 11:51 PM.


#2 pdx5

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Posted 04 February 2016 - 01:11 AM

Why are bad loans a problem? If loan is in default only the lender suffers, not the whole economy.

and it is only a paper loss for the lender.  People declare bankruptcy every year by the millions.

Nobody bats an eyelash. The lender has already priced in possibility of default for a certain percentage 

of loans and it is baked into the interest rates paid by other borrowers. Same thing with credit cards.

The rates are so high to cover those who will not pay their bills.


Edited by pdx5, 04 February 2016 - 01:15 AM.

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#3 alexnewbee

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Posted 04 February 2016 - 04:23 AM

Why are bad loans a problem? If loan is in default only the lender suffers, not the whole economy.

and it is only a paper loss for the lender.  People declare bankruptcy every year by the millions.

Nobody bats an eyelash. The lender has already priced in possibility of default for a certain percentage 

of loans and it is baked into the interest rates paid by other borrowers. Same thing with credit cards.

The rates are so high to cover those who will not pay their bills.

not a bad loan is a problem, quantity makes it. 

then interest rate for the rest of borrowers goes up exponentially.


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#4 csw2002

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Posted 04 February 2016 - 05:31 AM

Is it really that bad? Here is some more elaborate considerations from Humble Student of the Market

 

Excerpts from his post

Why China won’t blow up the world (this year)

 

What western analysts get wrong

Let’s consider what western analysts are getting all wrong when they look at China. Here is Worth Wray outlining the problem:

It’s no secret that China is slowing under a massive debt burden. After the financial crisis of 2008, China went on one of the biggest debt binges in modern history. There are very few parallels and any close examples have ended in hard landings. These kinds of rapid debt growth periods never end well and lead to broad based misallocation; it leads to a lot of bad assets and non-performing loans in the banking sector (even if they’re hidden in China right now). It’s a problem that’s draining liquidity from the banks; it’s sapping growth potential. And so China’s economy is naturally slowing. Now a slowdown is something that you’d expect anyway in China because you’re seeing that economy get much bigger and you’re seeing real GDP per capita grow—you always see economies slowing like that as they develop. But this is a different matter. This is largely debt-induced and China has exhausted the growth model that’s driven it for so long which is largely reliant upon credit, upon investment, and that can’t go on any longer.

Here is the critical error that he makes by assuming that the system has to come crashing down:

The trouble here is that making the transition to a new economic model driven by consumption and services and technology, it sounds fantastic but it’s going to require a cleaning out of the banking system, a cleaning out of bad debt—t’s going to require a tremendous amount of upheaval in these old-economy sectors like infrastructure, construction, real-estate, mining and I’m afraid China is past the point of no return. I don’t think it can pursue that rebalancing plan without Beijing losing an extraordinary amount of control, probably without a hard landing.

China = Argentina, Thailand, Russia?

Here is what many analysts are really thinking when they look at China, “OMG! A gargantuan episode of debt-fueled growth! Asian Crisis! Russia Crisis! Mexico! Argentina!”

The analysis is superficially correct, but the critical piece that is missing is that the template of past EM crisis has been a pattern of excess borrowing in foreign currencies, usually USD. The global economy hits a speed bump, the overly indebted EM economy is forced to devalue its currency, which exposes the country and its corporate borrowers to a negative currency shock. Those EM countries were left vulnerable because of a combination of excessive external debt and a current account deficit.

By contrast, the Chinese economy was fueled mainly by RMB-denominated debt (minimal foreign exchange exposure) and China is running an enormous current account surplus. Consider the level of aggregate Chinese foreign debt exposure and tell me why we should be worried. This story from Barron’s indicated that China has external debt of USD 1.7 trillion, which sounds high. But upon closer examination, about half of that is denominated in RMB:

As of the end of June 2015, China had USD1.68 trillion of external debt, of which USD823.7 billion was denominated in RMB. About half of China’s total external debt, therefore, does not carry the currency risk of foreign currency-denominated external debt (FX debt). Not only do exchange-rate swings not affect the burden of servicing RMB-denominated debt, but also, in the most adverse scenario, the central bank can act as lender of last resort and print money to help borrowers.


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#5 gm_general

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Posted 04 February 2016 - 08:34 AM

 

Why are bad loans a problem? If loan is in default only the lender suffers, not the whole economy.

and it is only a paper loss for the lender.  People declare bankruptcy every year by the millions.

Nobody bats an eyelash. The lender has already priced in possibility of default for a certain percentage 

of loans and it is baked into the interest rates paid by other borrowers. Same thing with credit cards.

The rates are so high to cover those who will not pay their bills.

not a bad loan is a problem, quantity makes it. 

then interest rate for the rest of borrowers goes up exponentially.

 

Interest rates cannot go up and they know it - if they did to any significant degree, the debt service costs would exceed the ability to pay, and voila, its worse still for the banks, more bankruptcies. Bleeding off massive amounts of debt, like the 10% total debt bled off in the 2008-2009 crisis (now a memory, mind you), is actually beneficial, assuming you are not some bank who overdid the loan thing. Banks who used to loan foolishly would go bankrupt, and some other banks who did not would get the added business after the blowup.

 



#6 alexnewbee

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Posted 04 February 2016 - 08:46 AM

 

 

Why are bad loans a problem? If loan is in default only the lender suffers, not the whole economy.

and it is only a paper loss for the lender.  People declare bankruptcy every year by the millions.

Nobody bats an eyelash. The lender has already priced in possibility of default for a certain percentage 

of loans and it is baked into the interest rates paid by other borrowers. Same thing with credit cards.

The rates are so high to cover those who will not pay their bills.

not a bad loan is a problem, quantity makes it. 

then interest rate for the rest of borrowers goes up exponentially.

 

Interest rates cannot go up and they know it - if they did to any significant degree, the debt service costs would exceed the ability to pay, and voila, its worse still for the banks, more bankruptcies. Bleeding off massive amounts of debt, like the 10% total debt bled off in the 2008-2009 crisis (now a memory, mind you), is actually beneficial, assuming you are not some bank who overdid the loan thing. Banks who used to loan foolishly would go bankrupt, and some other banks who did not would get the added business after the blowup.

 

 

why cannot interest rate go up? of course it can. depends on the borrower. your credit card provider will be forced to charge you 50% if defaults rate is high enough


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#7 SemiBizz

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Posted 04 February 2016 - 09:10 AM

There's no liquidity anywhere... something the World had too much of, got drunk and now...  the cupboard has been drained of the sacramental wines... 

 

The loans and contracts are the underlying components of huge derivative products, with the action stacked up all over the World.

 

For the most part beautifully offset with hedging strategies.

 

They are built using "universally acceptable odds"...

 

There are many examples of how low probability events have come home to roost... but the easiest example is what is happening to oil...

 

The odds were that crude wasn't going under $50

 

That ship sailed a long time ago...

 

Now we're dealing with $25

 

No wonder the financial World is blowing up.


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#8 gm_general

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Posted 04 February 2016 - 09:30 AM

 

 

 

Why are bad loans a problem? If loan is in default only the lender suffers, not the whole economy.

and it is only a paper loss for the lender.  People declare bankruptcy every year by the millions.

Nobody bats an eyelash. The lender has already priced in possibility of default for a certain percentage 

of loans and it is baked into the interest rates paid by other borrowers. Same thing with credit cards.

The rates are so high to cover those who will not pay their bills.

not a bad loan is a problem, quantity makes it. 

then interest rate for the rest of borrowers goes up exponentially.

 

Interest rates cannot go up and they know it - if they did to any significant degree, the debt service costs would exceed the ability to pay, and voila, its worse still for the banks, more bankruptcies. Bleeding off massive amounts of debt, like the 10% total debt bled off in the 2008-2009 crisis (now a memory, mind you), is actually beneficial, assuming you are not some bank who overdid the loan thing. Banks who used to loan foolishly would go bankrupt, and some other banks who did not would get the added business after the blowup.

 

 

why cannot interest rate go up? of course it can. depends on the borrower. your credit card provider will be forced to charge you 50% if defaults rate is high enough

 

 

Because the economy does not seem to be doing too well under interest costs that amount to about 15% of GDP (about $2.3-2.5T on $62.6T total debt . As debt went up, rates dropped with a seeming "intent" to target a interest costs of 15-18% of GDP, hence they went down. The last 3 times we exceeded that percentage range, we had a recession. If rates go up, new debt and debt rolling over will get those higher rates, and the service costs go up.



#9 alexnewbee

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Posted 04 February 2016 - 09:41 AM

 

 

 

 

Why are bad loans a problem? If loan is in default only the lender suffers, not the whole economy.

and it is only a paper loss for the lender.  People declare bankruptcy every year by the millions.

Nobody bats an eyelash. The lender has already priced in possibility of default for a certain percentage 

of loans and it is baked into the interest rates paid by other borrowers. Same thing with credit cards.

The rates are so high to cover those who will not pay their bills.

not a bad loan is a problem, quantity makes it. 

then interest rate for the rest of borrowers goes up exponentially.

 

Interest rates cannot go up and they know it - if they did to any significant degree, the debt service costs would exceed the ability to pay, and voila, its worse still for the banks, more bankruptcies. Bleeding off massive amounts of debt, like the 10% total debt bled off in the 2008-2009 crisis (now a memory, mind you), is actually beneficial, assuming you are not some bank who overdid the loan thing. Banks who used to loan foolishly would go bankrupt, and some other banks who did not would get the added business after the blowup.

 

 

why cannot interest rate go up? of course it can. depends on the borrower. your credit card provider will be forced to charge you 50% if defaults rate is high enough

 

 

Because the economy does not seem to be doing too well under interest costs that amount to about 15% of GDP (about $2.3-2.5T on $62.6T total debt . As debt went up, rates dropped with a seeming "intent" to target a interest costs of 15-18% of GDP, hence they went down. The last 3 times we exceeded that percentage range, we had a recession. If rates go up, new debt and debt rolling over will get those higher rates, and the service costs go up.

 

I have no doubts that we are going in a recession, and a severe one. And interest will go way higher, for usual borrowers, probably not so much for US gov. 


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#10 dasein

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Posted 04 February 2016 - 09:54 AM

loans are needed for productive business - if interest rates are too high - investment is curtailed basis ROI - if interest rates are too low - malinvestment happens - if the money loaned to poor investments disappears due to no ROI there is no money left to loan to businesses that need it and could pay it off - but are conservative enough to create a realistic hurdle rate.

 

high interest is bad, free money is bad etc


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