In a post on China's chat app and social media platform WeChat, the influential editor-in-chief of state-backed Global Times newspaper Hu Xijin said Evergrande should not rely on a government bailout and instead needs to save itself. This also chimes with Beijing's aim to rein in corporate debt, which means that such a high profile bailout could be seen as setting a bad example.
Reporting by Peter Hoskins and Katie Silver. Shares in cash-strapped China property giant plunge. China applies to join key Asia-Pacific trade pact. Image source, Getty Images. Evergrande is currently building a new stadium for its football team, Guangzhou FC.
What does Evergrande do? Why is Evergrande in trouble? Why would it matter if Evergrande collapses? These institutions are, ironically enough, required by regulators to hold substantial stocks of UK gilts in their portfolios and as capital because gilts are supposedly ultra-safe.
If their value is shredded and they are demonstrably not safe, then the destruction of wealth that follows will indeed be unprecedented, and devalue every pension pot in the land. It would rapidly trigger another financial crisis, as the banks would have to scramble to raise money, and the pension funds would find themselves facing insolvency as the worth of a large proportion of their assets gilts shrinks while their liabilities pensions stayed the same.
They might have to sell gilts and their shares at fire-sale prices in order to reinvest in the remaining government bonds that are deemed safe, such as US Treasury bills — though there is no guarantee that even the mighty US might not follow the UK and Greece into financial ignominy.
In Hollywood terms we are waiting for "Credit Crunch 2". The British would be faced with the "too big to fail" problem again, but on an even grander scale. It is unthinkable that we would let pension funds, insurance groups and big banks go bust — but the Treasury would no longer be able to issue gilts to pay for bailouts.
As a nation we would be bust, risks transferred from markets to banks to taxpayers, but ultimately unmanageable. We would have to go to the IMF and would qualify for a bailout, but it would be with very painful conditions.
A British sovereign debt crisis would make sub-prime look like a tea party. Anyone declared bankrupt can, in principle, start up a new business activity, although this may be prohibited by the courts. While individuals and businesses sometimes or are forced to give up and declare themselves bankrupt, it's a bit more complicated for a country. Suppose that Belgium could no longer pay its debts to the Netherlands. Would the Netherlands gain control over Belgium?
Would Maxima and Willem-Alexander gain a holiday home in Laken? And would our national anthem change? The chances of this happening are rather small.
Nevertheless, countries can go bankrupt — even multiple times. Countries such as Ecuador, Venezuela, Brazil, Costa Rica, Uruguay and Argentina have each gone bankrupt at least nine times in the last years. But even closer to home, several countries have found themselves out of their depth once or more: Greece, Denmark, Germany, France, Spain more than 15 times and Portugal, to name but a few.
Belgium has never gone bankrupt since it was founded in The major difference compared to businesses and private individuals is that the bankruptcy of a country is a technical bankruptcy, also known as a default. In the past, it has been known for a bankrupt country to be forced by another country to hand over territory, but the rules of the game nowadays have changed.
When a country is in default, public property cannot be seized by the creditor, nor can the country be forced to pay with funds it doesn't have. The situation is rather different for national assets located abroad. By way of example, in , an Argentinian navy ship was confiscated in Ghana when Argentina defaulted.
It may, for example, write off part of the government debt or provide emergency loans. Of course, all this is subject to terms. The country is often obliged to carry out a major restructuring of its public finances. What's more, a write-off by the IMF doesn't necessarily mean that all the creditors will agree — if the IMF writes off debt for one country, it obviously means a financial loss which may be severe for another.
After a lot of legal and diplomatic back and forth, however, a 'solution' always emerges, as was the case with the Greek bailout, for example. In , countries are therefore no longer allowed to 'truly' go bankrupt. There's too much at stake for this to happen. Sovereign debt crisis may also lead to subsequent economic crisis and currency crisis as aggregate demand fall and international market lost faith in its currency.
Another effect that is certain about a defaulted country is its lost of accessibility to the credit market. Punitive rate is imposed on its loan or in most cases, it will not get the loan at all. Credit rating of defaulted country will be affected, deterring foreign investment in the country.
Default deters domestic and foreign investment. However, the fall in assets prices and exchange rate of the defaulted country has made these assets easily affordable for foreign investors. This may signify investment potential in the defaulted country. There are also investors who see default as the perfect time to invest.
Vulture funds seek to profit from the crisis by mass purchasing high yield high risk bonds of the near-default or defaulted country at highly discounted price and anticipate rebound on its values as the country recovers.
However, it carries risks as to whether there will be a rebound in the asset prices in the defaulting economy, or if the recovery is worth the wait.
Due to the cost of default, a country will choose to default only if it is better off not paying its debts. In Argentina, many think that default was the best thing to happen. After the peso plummeted, Argentina product becomes more competitive in the international market.
The inflow of money lead Argentina to its recovery. In addition, evidence suggests that the adverse effects of default are rather short-lived. The effect of default will be less substantial if it relies less on foreign loans as it is able to soothe out these effects through implementation of monetary and fiscal policy. Defaulting on loan may be a boon than a bane for a heavily indebted country despite its consequential effects.
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