Does Evergrande’s bankruptcy affect the US stock market?
The Evergange crisis begins to worry investors in the United States as the company declares bankruptcy and shows little sign of being able to pay its debt.
Although the company has been in debt for many years, it was not until after 2020 that its finances have come under scrutiny.
In 2020, at avoid financial collapse, like that observed in the United States in 2008, the Chinese government adopted restrictions on the amount and types of debts a business could own. Evergrande quickly violated these restrictions, meaning they no longer being able to take on more debt, which sent the business into a free fall.
How did the company contract so much debt?
For decades, the company has survived by attracting investment – or debt – in commercial properties which would then be sold to reimburse investors.
However, as the Chinese government began to investigate the company’s financial records, it became evident that the economic model would not be able to support the full repayment of their debts. The company had inflated the values of their properties, which created a false image of financial solvency. In the end, the Evergrandes were selling their properties for prices well below what their records showed, put them in the red, and therefore depend on acquiring more debt to keep their doors open.
What does it mean for investors if the company defaults?
Thursday September 23, Evergrande was about to pay $ 83.5 million in interest payments. He missed the deadline. On September 29, the company is due to pay an additional $ 47.7 million. Fortunately for Evergrande, they have a thirty day grace period before they default on their debts, but already investors fear that it far-reaching impacts on global markets.
For investors and banks who own pieces of corporate debt, many of their concerns stem from the idea of ”contagion. “In the financial world, contagion refers to the effect a default has on the bonds of other investors or institutions.
Say, a bank is due $ 40 million Everglade, and these debts go unpaid. Well, if that bank is in debt to another company and can’t make those payments, a cycle of failure could start to spread through the economy. Such a phenomenon could lead to a liquidity crisis, where it becomes more difficult to get loans.
Impacts on the US Stock Market
One of the biggest problems with this crisis is Hourly.
Throughout the pandemic, many governments and central banks have had to use massive public spending to avoid a total collapse. With so much money at the door, there’s less to count on to help stabilize the economy if there were to be serious fallout.
The S&P 500, a key indicator used by investors to gain insight into the market position fell around five percent from September 2 to 20. However, all of this was not due to the Evergrande crisis. The US stock market has performed well throughout the pandemic, but as a federal stimulus the taps are off, the market could suffer.
After a slow employment report in August, end of federal unemployment benefits, and the odds of a fourth stimulus check dwindle, investors predict that the the tide might take a turn for the worst. All of this is of course happening alongside an increase in covid-19 cases from the more contagious Delta variant; a reminder that the public health crisis is far from over, and itcontinues to threaten economic recovery.
The Chinese Communist Party has made efforts to mitigate a total collapse, such as injecting more $ 18 billion in the financial system to avoid liquidity shortages. However, the Chinese government has shown no interest in bailing out Evergrande. Chinese executives and many critics of the US financial system share a similar idea that the company’s bailout could create perverse incentives for other companies to get over-indebted, thinking that the government would come to their aid.
During the 2008 financial crisis, the US government bailed out several banks to avoid an economic depression. But some economists believe that many of these companies were not penalized almost enough to prevent them from using the same practices that could lead to the same problems in the future.