Evergrande to default on Thursday, turmoil to get worse before it gets better – Danske Bank
|Evergrande needs to pay interest payments on Thursday including a coupon worth USD83.5 M. Economists at Danske Bank believe a default could trigger further contagion in Chinese markets with some spill-over to global markets.
Chinese government to eventually intervene
“One scenario is that Evergrande ends up in bankruptcy but that the government will try to ringfence the company to avoid contagion. This might be done by ordering state banks to buy high yield bonds in the market and at bond issuances by other developers. And that state banks lend developers money enough to avoid others from defaulting. Once the government shows its’ hand in the market, other investors will probably step in and buy credit bonds again. A big gain could be made if credit bond yields decline subsequently from current high levels.”
“A worse case scenario is that Beijing does not intervene. That could lead to a severe crisis as domino effects would lead to a financial crisis. A middle scenario would be that they intervene but very late and that global financial markets and global economy will take a big hit before things turn around again.”
“Our baseline scenario is that Evergrande defaults this week and that things will get worse before it gets better. The timing of when it gets better is very difficult, as it depends on 1) how bad markets develop and 2) Beijing’s patience before stepping in.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.