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Samson:  An economic crisis may affect five of the world's largest economies

18th August, 2019

Face 5 of the world 's largest economies are currently at risk of exposure to the economic crisis may occur does not require a lot. 

The UK economy shrank in the second quarter and growth stagnated in Italy, while data published on Wednesday showed that the German economy, the world's fourth largest, contracted in the three months before June. 

Mexico has evaded an economic recession, which is usually two consecutive quarters of deflation, and the country's economy is expected to remain weak this year, while data suggest that Brazil experienced a recession in the second quarter.  Germany, Britain, Italy, Brazil and Mexico are among the top 20 economies in the world. 

Singapore and Hong Kong, both smaller but of global commercial significance, also suffer. Although economic growth has been declining in each country due to a combination of determinants, the global industrial recession and sharp decline in business have made matters worse. 

The Chinese economy is facing the slowest growth in nearly three decades, with the country experiencing a long-term trade war with the United States, which plans to impose new taxes on Chinese exports in September and December. 

The International Monetary Fund last month cut its forecast for global economic growth this year to 3.2%, the weakest expansion since 2009, while cutting its forecast for 2020 to 3.5%.  These indices have caused growing concern among investors as the bond market is not promising, with more than a third of asset managers surveyed by Bank of America forecasting a global recession in the next 12 months. Neil Schering, chief economist at Capital Economics, says he sees no clear justification for the gloomy recession. Corporate spending on assets, such as equipment, has stabilized globally and the labor market is flexible, he said. 

However, Schering also points to some of the major risks that have affected the economy recently. First, the trade war between Beijing and Washington says that if Beijing and Washington continue to escalate tensions, it could affect corporate confidence. The International Monetary Fund has warned that growth in 2020 will halve if the conflict intensifies.

Another big risk is that central banks will fail to act, causing a negative reaction in financial markets that feed on the real economy. The US Federal Reserve cut interest rates last month for the first time in 11 years, while pressure is growing on China to cut its key interest rate for the first time in four years. Other central banks from India to Thailand have also cut interest rates, and further cuts are expected.  LINK

Don961:  Declining banks' dominance of the debt market threatens a violent global crisis

 17 August 2019 05:08 PM

Edit: Noha copper

Direct: Some investors worry that the build-up of huge global debt since the financial crisis a decade ago cannot be sustainable

Indeed, an analysis published by Bloomberg Openion suggests that in reality large debt can be sustained for a longer period, but only in accordance with the risk of a more severe correction in the future

This comes with the fact that this credit cycle may not be typical, as politics is driving the current expansion

Governments and central banks have encouraged debt-led consumption and investment to stimulate economic growth

Ample liquidity, central bank purchases of debt and zero or negative interest rates have allowed high debt levels to be sustainable and servicing costs can be paid

Great changes

These policies fundamentally change the mechanisms of credit markets. For example, with negative interest rates, borrowers can default if they fail to repay only the principal amount, because the interest payments required are small or non-existent

In Japan, poor profitability from negative interest rates has discouraged banks from trying to collect bad debts, instead relying on negative benefits to allow bankruptcy companies to continue working by providing them with loans

Signs of the debt plight include deteriorating credit quality, poor debt servicing and an increase in the number of non-performing loans, which are of little concern at present

Banks are less important now

At the same time, the less interesting shift in credit markets should serve as warning whistles, as banks have become less important as a debt provider since 2008, reflecting increased capital requirements and declining leverage within the banking sector

Investors have replaced banks not only with traditional debt providers such as insurance companies and pension funds, but with new participants such as investment funds, ETFs, hedge funds and foreign investors

For example, ETF holdings of corporate bonds have doubled since 2009 to about 20 percent of total bonds offered

The share of US banks in leverage debt has fallen to about 8 percent, while collateralised loan commitments, managed by specialized fund managers, have increased by about 60 percent of total issuances

Foreign investors currently hold about 30 percent of the US corporate bond market

High investor contributions to bond markets threaten to make any downward spiral more aggravated, as investors do not have enough capital to mitigate losses

Unlike cases where the bank is the lender, the losses will be passed on immediately to the end investors, accelerating the impact of any deterioration in credit conditions

Moreover, many mutual funds operate with a mismatch between assets and liabilities, and investors can redeem the bond in a short period of time, but the fund's assets usually include a long-term portfolio

The problem is exacerbated because the search for returns has encouraged funds to invest in a higher risk environment and less liquid assets, from which they may not be able to make enough quick profits to meet the redemption process

Another problem arises when investments are financed by leverage loans, where if asset values fall, funds may have to sell long-term, often illiquid assets to cover the cost of margin buying

These funds generally have limited liquidity reserves to withdraw from them instead. Unlike banks, they do not have access to the lender of last resort facilities

Investors are pursuing rules-based strategies, and downgrades often exceed the prescribed limits or a significant drop in prices often cause the fund to be liquidated or affect operation

Most corporate debts currently range from a credit rating of BBB or higher, or a non-investment grade of BB or below

The share of investment grade debt ( BBB ) has increased almost four times its size since 2009, and any reduction will result in forced selling as investors limited to investment grade bonds will need to exit

Banks with loans to maturity are less affected by such changes

High participation by foreign investors poses different problems, and they will likely need to suddenly adjust their investment in response to currency fluctuations and higher foreign currency hedging costs, as well as a downgrade

The gravity of the next crisis

Ultimately, investors are ineligible to deal with financial crises. Banks can work with borrowers, restructure liabilities, or convert loans into equity to minimize losses

In contrast, many investors will sometimes be forced to sell their holdings at undervalued prices

Regulators and markets have taken steps to strengthen the banking system since the global crisis, but the problem is that in any future credit downturn, the tools to curb the crisis that banks can apply will have less impact than before, which will increase volatility and exacerbate any future financial crisis

In order to address declining investor demand and potential forced selling, policymakers need to increase their market intervention by imposing minimum capital and liquidity reserves, such as those applied to banks

If they don't, they risk using public funds to bail out investors to prevent a major financial crisis

The dilemma illustrates a fundamental aspect of the markets: risk never disappears, it only moves to the least regulated angle you can find     link

Frank26:   FIREFLY TELLS US OF ANOTHER BANK

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