25 ms·

Evergrande has defaulted on its debt, Fitch Ratings says

484 points by Pigalowda 5y ago

ur-whale 5y ago
Cue in Tether's explanation of how their currency is pinned to real world value in 5,4,3...
mdrzn 5y ago
> "The People's Bank of China and other top financial regulators have tried to reassure the public that Evergrande's problems can be contained. The central bank on Monday also announced that it would pump $188 billion into the economy, apparently to counter the real estate slump." I guess it's all fine then. Nothing to worry about. Keep walking. /s
- worstestes 5y ago
  What are the ramifications of the PBoC “pumping” money like this?
  - AnimalMuppet 5y ago
    We all wish we knew. One thing I think is interesting: $188 billion? That should be about the scale that PBoC estimates the losses will be. That number might be a lot bigger than just Evergrande...
- deleted 5y ago
  [deleted]
choeger 5y ago
Can someone here enlighten me how a default can be "contagious"? I could imagine that Evergrande bonds become worthless so that many investors will realize losses. But surely no one, or very few, will have invested mostly into Evergrande bonds, right? So presumably, everyone will realize a relatively small loss, no?
- s_Hogg 5y ago
  It's simple Who's next? Get out of that as fast as possible Enough people think like that, hey presto
- lordnacho 5y ago
  One firm defaults, all their investors lose a bit of money. Now that they've lost a bit of money, they will have less money to lend to other firms. Now those firms find it harder to service their debts (eg they were planning to roll over their loans with other loans), so some of them default. A firm in the real estate business defaults. That makes people think other firms in that business will also default. So then all real estate businesses find it a a bit harder to borrow. Add leverage. I buy a loan from a number RE businesses, but I don't just use the money in my pocket. I borrow it from the bank at a lower rate than what I receive from Evergrande. They go bust, bank asks me for money, I need to sell my other loans in the RE firms. Those loans will go down in value, reflecting higher rates and making it harder for the firms. This credit cycle is described by Soros in his books. Works both ways actually, when things are good it's the reverse.
  - technofiend 5y ago
    That's the gentle dominoes falling version. Then there is the version where lending institutions completely rethink the risk in that sector. In that version they call loans and stop extending credit to same or similar businesses overnight. When Enron collapsed every other energy trading firm lost access to trading capital, taking out the entire sector. Whether or not energy companies should have been speculating in the futures market with borrowed money is a separate conversation.
    - vlovich123 5y ago
      Maybe it’s not a separate conversation? Maybe you shouldn’t be allowed to speculate on the futures in your company’s sector?
  - DebtDeflation 5y ago
    > One firm defaults, all their investors lose a bit of money. Now that they've lost a bit of money, they will have less money to lend to other firms. There's a lot more to it than that. You have to take into account 1) We have a fractional reserve banking system. When banks start individually calling in loans, there isn't enough "money" in the system for everyone to repay them. 2) Asset market prices (e.g., equities) reflect the present discounted values of expected future earnings. When everyone suddenly expects those future earnings to be less, the prices of those assets fall precipitously. That's not an issue in and of itself, except that those assets may have been purchased on margin (a loan) which depends on the value of those assets and may suddenly be called in for payment, forcing a liquidation of the underlying assets and further price falls. 3) As businesses scramble to pay loans that have been called and to adjust to a market where credit is difficult to come by (and businesses run on credit not cash) they reduce costs and often do so by laying off workers. This causes a reduction in aggregate demand (worker income) across the economy which further exacerbates the problem. There is inherent instability in the system and all sorts of positive feedback loops that can amplify an initial shock. Suggest reading Irving Fisher and Hyman Minsky to understand more.
mensetmanusman 5y ago
Apparently employees were told to invest in the company or they would be denied payment/bonuses. Feel sorry for everyone involved in this dumpster fire.
- giansegato 5y ago
  Sounds eerily similar to what happened during the Enron saga. So many employees tricked into keeping all their pension savings into the stock. Quite a sad story.
  - danpalmer 5y ago
    It's sad, but I think "tricked" is a simplification. Being tricked into thinking it was safer than it was, yes, but being tricked in order to boost the share price or maintain the company, I'm not so sure. Even towards the end the CEO was taking out personal loans secured on his Enron shares... in order to buy more Enron shares. This was a big contributor to the snowball effect when the share price started falling. I think the top people at Enron honestly believed in the stock and were probably mostly pushing it for employees on this basis. That was pure hubris, thinking they were smarter than everyone else. They should have known better and some were rightfully prosecuted for their part, but it's a bit more complicated than saying the employees were "tricked".
    - mlac 5y ago
      The WSJ did a fantastic podcast on this recently called Bad Bets. If there is any interest it is worth a listen.
  - refurb 5y ago
    What are “pension savings”? When I had a corporate pension it was an obligation of the company that I had zero say in.
    - mikeyouse 5y ago
      Yeah OP called it a pension when it was really a 401(k) — but Enron had some sort of setup where employees could choose to buy Enron shares at a discount into their 401(k) but importantly, Enron’s “employer contributions” were also in the form of Enron stock, which couldn’t be sold by the employee until they turned 50. Then when the company started failing, they instituted a trading blackout so employees couldn’t sell their stock for weeks before the bankruptcy. Of course, there was a corporate pension as well that failed and was was also largely in Enron stock. So now those liabilities are owned by the PBGC.
Kye 5y ago
Copying my comment from the previous thread where it was maybe-defaulting: https://news.ycombinator.com/user?id=Kye https://news.ycombinator.com/user?id=Kye -- Some good explanatory threads I saved when the Evergrande news first broke a couple of months ago: https://twitter.com/SahilBloom/status/1439920043404546050 https://twitter.com/SahilBloom/status/1439920043404546050 https://twitter.com/FabiusMercurius/status/1439218956779151361 https://twitter.com/FabiusMercurius/status/14392189567791513... https://twitter.com/INArteCarloDoss/status/1438944431734919175 https://twitter.com/INArteCarloDoss/status/14389444317349191...
- teddyh 5y ago
  That thread is here: https://news.ycombinator.com/item?id=29178102 https://news.ycombinator.com/item?id=29178102
mattbrewsbytes 5y ago
Will the People's Bank of China be paying Evergrande's foreign debts (aka bonds)? How many derivative products were created off those in other markets? Will it be as bad as 2008/09 when Mortgage Backed Securities and their derivatives collapsed except this time it is Commercial Mortgage Backed Securities? Just asking questions in case anyone closer to those business areas wants to chime in. I doubt there is transparency coming out of China about this.
- EarthIsHome 5y ago
  I think it's pretty clear that China isn't going to bail them out like how the US bailed out our failed companies back in 2008. China cares more about protecting the homebuyers and contractors who are building the homes more than protecting the investors [0][1]: > Evergrande has almost 800 projects across China, many of them funded by advance payments from homebuyers. > Local governments have ringfenced homebuyer deposits and other funds to ensure that Evergrande projects in their jurisdiction are completed and contractors paid on time. So this is a much different reaction than the US government who protected the investors and banks. [0]: https://www.ft.com/content/6d6b1f79-52b3-49e5-aa8a-7068adec7a9d https://www.ft.com/content/6d6b1f79-52b3-49e5-aa8a-7068adec7... [1]: archive.is link of [0] https://archive.ph/GKWmv https://archive.ph/GKWmv
  - starfallg 5y ago
    >So this is a much different reaction than the US government who protected the investors and banks. It was mainly to prevent systemic collapse of the financial system. Banks and other financial institutions profiting from it is an 'unfortunate' side-effect.
    - kmlevitt 5y ago
      Why couldn’t they have prevented the systemic collapse simply by bailing out the individual homeowners? If they had gotten bailed out, so would have their banks.
      - 5y ago
hericium 5y ago
I truly have thought that Xi would keep his ability to shake US market for longer.
bluedays 5y ago
I think this is going to end up having some very broad ramifications. The last time a real estate started defaulting on it's debts it create a cascade that ultimately ended in the 2008 financial collapse.
- jpgvm 5y ago
  This is very substantially different. The real problem with 2008 was all the banks were leveraged to the tits on mortgage backed securities. Chinese banking system on the other hand is very conservative and the banks are state owned. The problem wasn't real estate developers getting shreked but rather the financial institutions the underpin everything suddenly facing massive liquidity crisis and enormous losses as MBS plummeted. I fully expect a bunch of over-leveraged Chinese RE developers to fold here but I don't expect further contagion unless there is something unaccounted for - like international institutions being overly exposed to bad Chinese RE debt or something.
  - papito 5y ago
    Well, we are going to find out if Tether is exposed to it, won't we. Big, if true, and it would set off a nuclear bomb under crypto.
    - jpgvm 5y ago
      Eh, crypto imploding will have zero net impact on anything important. I understand why crypto crew care but I don't get why anyone else would.
throwaway69123 5y ago
Good.
captainmuon 5y ago
Maybe someone with more knowledge can explain this to me. When they defaulted, that means that they failed to pay back one of their debts, it does not mean that they are completely out of money, right? What stops them from selectively defaulting? Stop paying back some of the politically less important debts, and continue chugging on, servicing only certain debtors. I'd assume with unlimited political backing this should not be a problem. OTOH I read somewhere that the political leadership is not amused and wants to make an example. Also, I would say China has benefited a lot from the international financial system and from the rules of international commerce, so they probably have to honor international debts.
- sbarre 5y ago
  From reading the article, it seems they need to raise more money to actually resume many of their construction projects (which is where their revenue comes from), and because they are unable to repay existing debt, no one else wants to give them money.
  - vesinisa 5y ago
    Which is hardly surprising, given how insane the Chinese real estate bubble is. I understand there are entire ghost cities of extensive high-rise developments - sitting largely abandoned and owned as vacant second homes by Chinese private investors waiting to sell them on a profit thanks to an urban migration that might never happen. Edit: I don't know why am I being downvoted. The Chinese real estate bubble has been rather well-documented, see e.g. this YouTube video: https://youtu.be/EgVXRtq5EIg https://youtu.be/EgVXRtq5EIg
    - pjc50 5y ago
      Yes, this is basically Anglo-Irish Bank on a much larger scale.
- api 5y ago
  That seems right. When people get into money trouble they will start skipping some debt payments first. The mortgage or rent is usually last to skip for obvious reasons.
thedudeabides5 5y ago
My hot take on this. Yes it matters Yes there will be contagion No it won’t stop until the government (Xi and PBoC) agree on how bad it will get before they start bailing others out. Now that too big to fail is dead in China, expect more failures, basically. https://t.co/TXNfUdoVi5 https://t.co/TXNfUdoVi5
- VortexDream 5y ago
  You realize that they've already repeatedly said they'd "bail out" people and groups affected by this? They just weren't willing to reward Evergrande's reckless behavior by giving them more money. Something the US should've done (so much for free market capitalism as a principle).
  - deleted 5y ago
    [deleted]
  - candiddevmike 5y ago
    I don't think it's clear yet if they plan to bail out everyone or just Chinese-based people and groups. From my understanding, evergrande had a lot of international investors.
    - Kinrany 5y ago
      Regardless of whether China does it, bailing out the debtees and letting the debtor fails is what other countries should do in the future.
      - littlestymaar 5y ago
        That doesn't bring better incentives that bailing the debtor out: it still encourage to lend money recklessly.
        Kinrany 5y ago
        This creates at least one agent that will directly suffer the consequences of the default they caused. Of course one can create two companies, make the first borrow from the second, make the second hide the money and default, get the first bailed out and pocket the hidden stash. But they'll be easier to go after.
danlugo92 5y ago
Tether's headquarters must be on fire right now.
- JohnJamesRambo 5y ago
  “Tether does not hold any commercial paper or other debt or securities issued by Evergrande and has never done so. As we have indicated in our published statements and our most recent assurance attestation with a reporting date of June 30, 2021, the vast majority of the commercial paper held by Tether is in A-2 and above rated issuers.” Is there something I don’t know or are you just repeating stuff you think you know?
  - loeg 5y ago
    Tether’s operators have a history of repeatedly lying, though. It’s certainly possible they don’t hold any Evergrande debt, but it’s also possible they do and are just lying about it.
  - pjc50 5y ago
    Nobody knows anything about Tether reserves, and nobody will admit to being their counterparty or even their broker, so Evergrande was just made up as a possible candidate. $72bn of mystery dark money.
    - JohnJamesRambo 5y ago
      As someone that grows weed legally in my state I do commiserate with their problems. Since weed is not legal federally if my banks ever find out the source of funds, I’m terminated instantly and asked to take my money and go. Our American Express account was terminated for exactly this reason a few months ago. I assume it is a very similar situation with Tether, since they have had banking issues in the past. Whoever they bank with would be shunned immediately by other banks and governments, as many see crypto rightfully as a competitor. But the money is too attractive so you do have banks crossing that line to help, on the caveat that it remain anonymous. You can’t run Tether or a weed operation without banking, so you see our conundrum.
gvv 5y ago
Any educated prediction on what the consequences of this might be for the rest of the world? Will the Bank of China bail them out like the US government did in 2008?
globalise83 5y ago
Interesting. This is the biggest developer in a sector worth 29% of China's GDP. If they can fail, so can all the other ones. Who would invest in Chinese real estate now, and where is the needed 8% plus GDP growth needed by China to meet its annual targets going to appear from?
- Hokusai 5y ago
  > Who would invest in Chinese real estate now It's not that true for Western countries after the 2008 financial crisis? It seems to not have stopped housing bubbles.
  - redblacktree 5y ago
    The biggest US real estate developers don't appear to be on the verge of default, no.
- Bayart 5y ago
  >Who would invest in Chinese real estate now The Chinese. Real estate is really the only investment open to the middle class. Property owners have on average nearly three properties, something stupid like that. That won't change.
FuriouslyAdrift 5y ago
Kaisa has also now defaulted... https://www.bloomberg.com/news/articles/2021-12-09/kaisa-cut-to-default-after-missing-400-million-bond-payment https://www.bloomberg.com/news/articles/2021-12-09/kaisa-cut...
- polycaster 5y ago
  Paywalled unfortunately
  - graedus 5y ago
    https://archive.md/MW0cN https://archive.md/MW0cN
  - Crosseye_Jack 5y ago
    https://github.com/iamadamdev/bypass-paywalls-chrome https://github.com/iamadamdev/bypass-paywalls-chrome Granted, the extenstion is pretty much targeted at Desktop and it really only works in Firefox without a nag screen, but yeah, its whatr I was on my own rig and I can't remember the last paywall I came across.
- boringg 5y ago
  Small money company - while there might be impacts to the economy the scale of these companies is small. Ripple effects contained in China. Once something happens to a US company I'll start paying super close attention.
  - ganeshkrishnan 5y ago
    A major chunk of evergrande is owned by black rock and HSBC. The ripple effects will be felt beyond china. This is like saying the virus is only circulating in china. I will pay close attention when it starts in US. I think the mortgage squeeze in china is far worse than the pandemic and they have done a good job of masking it. We will know in few months or years when the shock waves ripples thru here.
    - 5y ago
ur-whale 5y ago
So, how much capital did they suck in from foreign equity market in the end? Anyone know where to find the figure?
- AussieWog93 5y ago
  I don't know the exact figure, but I have heard that the overwhelming majority of their debt is held by domestic Chinese investors.
  - redis_mlc 5y ago
    $300 billion for Evergrande bonds from foreigners. $2T - $4T total from US capital markets, which funds BRI and the PLA. (Wall Street are literally traitors.) 91% of China's interntional trade is in USD, so cutting them off from US capital markets would be fatal economically in days.
fasteddie31003 5y ago
If you think US real estate is expensive, look at other county's income to property ratios. https://www.numbeo.com/property-investment/rankings_by_country.jsp https://www.numbeo.com/property-investment/rankings_by_count... In the US it's 4. In China it's 27. Imagine having to work over 27 years to afford a house.
- bamboozled 5y ago
  It's like 45 in Australia.
  - aembleton 5y ago
    7.27
    - bamboozled 5y ago
      There's absolutely no way a person an an average income could buy a home in Australia and pay it off in 7.27 years. Those figures are totally wrong. Many people would be lucky to save for a deposit on a place in 7.27 years.
      - 988747 5y ago
        That's not what this statistic means. It means that if you spent 0 dollars and saved all your income you would need 7.27 years to buy a house. In practice you need a mortgage, of course. But now think how bad this gets when a house price is your 40 years worth of income...
      - nostrebored 5y ago
        This view is detached from reality. Not every house is in the eastern suburbs of Sydney and lower quartile income in Australia is extremely high.
        bamboozled 5y ago
        I could buy a house at the end of a run way for cheap, or in a desert, but no one wants to live there.
paulpauper 5y ago
Bitcoin , which is supposed to be a hedge against uncertainty and inflation, going the opposite direction of S&P 500 despite virus, china, and inflation. goes to show how useless common narratives often are.
- echelon 5y ago
  Tether is said to not have 1:1 backing with USD and instead have exposure to Evergrande bonds. Nobody knows the veracity of this claim, because the organization itself is tight lipped, but it is posited by some critics. If Tether collapses, it could result in widespread blowback against the entire crypto market. There's also increased regulation in India and broader skepticism. Crypto is feeling anxious right now, and many are harvesting their gains based on the uncertainty.
pezzana 5y ago
From Bloomberg: > Bondholders of $19.2 billion in Evergrande dollar notes face deep haircuts as the company overhauls its mammoth balance sheet without a government bailout -- a process that promises to be long, contentious and potentially risky for Asia’s largest economy. https://www.bloomberg.com/news/articles/2021-12-09/evergrande-defaults-for-first-time-as-china-debt-strains-spread https://www.bloomberg.com/news/articles/2021-12-09/evergrand... It might seem odd that a Chinese company would have taken out dollar loans, but the practice is common around the world. One reason is that the borrower can get lower interest rates because they assume the exchange rate risk themselves. If that bet goes sour, though, the borrower faces higher costs to service the debt. Of course the thing about dollar bonds is that even if the national government were to intervene, those dollars can't be printed by Beijing. The only way to service a dollar debt is to raise dollars. One path to doing that is to sell dollar-denominated assets. US Stocks and bonds in other words. So the pressures in China can spill over into the US economy through forced asset sales of dollar-denominated assets. This is another angle to the contagion idea. Organizations around the world have taken big short position on the US dollar. As those loans come due, dollar assets are sold. Which drives the dollar higher. Which makes the dollar loans even more unsustainable. And so on. It has been called the global dollar short squeeze: https://www.lynalden.com/global-dollar-short-squeeze/ https://www.lynalden.com/global-dollar-short-squeeze/ And if you're really adventurous, there's something called the "dollar milkshake theory" which predicts the uncontrollable rise of the dollar as (maybe counterintuitively) a wrecking ball for the world economy: https://www.youtube.com/watch?v=2qTOWuL7Zco https://www.youtube.com/watch?v=2qTOWuL7Zco
- peter_retief 5y ago
  The world economy is in trouble, the US has leadership issues and China has declining growth. Inflation will soon strip away any gains in growth. Hold onto your seat.
  - toss1 5y ago
    Yes, except this type of event is massively DEflationary. Creation of more debt is creation of more money, increasing supply, and is inflationary. Conversely, destruction of debt destroys money, and is deflationary, in this case, deflationary to the dollar. Also, selling of dollar-denominated assets also decreases the dollar-value of those assets and so increases the value of the dollar. But it is inflationary for the Chinese currency. This is why with the Fed's QE programs since the 2008 crash everyon ehas been yelling "Inflation!!" for over a decade, yet there was none-negative until this year, and even that is arguably transient. So much money was destroyed in that crisis that they have been ever since then trying to fill in the (deflationary) hole. To the extent that that debt is denominated in dollars and is about to be destroyed, it will be dollar-deflationary, not inflationary.
steve76 5y ago
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mkoryak 5y ago
Does this mean that houses will finally become a bit more affordable in the US?
NelsonMinar 5y ago
Might be a rough week for Tether and therefore all cryptocurrencies. Tether's finances are murky af but it's widely understood they hold a lot of Chinese commercial debt. Not Evergrande specifically. https://cointelegraph.com/news/did-conflicting-reports-about-evergrande-defaulting-cause-bitcoin-to-tank https://cointelegraph.com/news/did-conflicting-reports-about...
boringg 5y ago
Evergrande defaults, contagion in China - ripple effects in china. Global media needs a story line to rattle the market, traders make money on the news. The world rolls on - it's not big enough to be a major problem. China can absorb this one. Now if the entire real estate in China goes south - thats a global problem and a huge political issue. That would signal that we might be on a warpath as the party would need to stabilize the economy with some kind of threat narrative or risk being run out of office. This is *highly speculative* of course.
deleted 5y ago
[deleted]
anm89 5y ago
I personally think people misunderstand this story. It's not a Lehman like structural issue. It's a consumer confidence issue in the Chinese real estate bubble and public finance issue relating to how Chineee municipalities finance normal operations via land sales through special purpose vehicles. Basically if Chinese people stop believing houses are an endless fountain of money they Chinese government is in an enormous mess and this seems to be a step towards that happening.
- 1270018080 5y ago
  It sure seems like a structural issue when Chinese people are paying 10x as much for a condo on 10% the salary as someone would here.

484 points by Pigalowda 5y ago

Cue in Tether's explanation of how their currency is pinned to real world value in 5,4,3...

> "The People's Bank of China and other top financial regulators have tried to reassure the public that Evergrande's problems can be contained. The central bank on Monday also announced that it would pump $188 billion into the economy, apparently to counter the real estate slump." I guess it's all fine then. Nothing to worry about. Keep walking. /s

worstestes 5y ago
What are the ramifications of the PBoC “pumping” money like this?
- AnimalMuppet 5y ago
  We all wish we knew. One thing I think is interesting: $188 billion? That should be about the scale that PBoC estimates the losses will be. That number might be a lot bigger than just Evergrande...
deleted 5y ago
[deleted]

choeger 5y ago

Can someone here enlighten me how a default can be "contagious"? I could imagine that Evergrande bonds become worthless so that many investors will realize losses. But surely no one, or very few, will have invested mostly into Evergrande bonds, right? So presumably, everyone will realize a relatively small loss, no?

s_Hogg 5y ago
It's simple Who's next? Get out of that as fast as possible Enough people think like that, hey presto
lordnacho 5y ago
One firm defaults, all their investors lose a bit of money. Now that they've lost a bit of money, they will have less money to lend to other firms. Now those firms find it harder to service their debts (eg they were planning to roll over their loans with other loans), so some of them default. A firm in the real estate business defaults. That makes people think other firms in that business will also default. So then all real estate businesses find it a a bit harder to borrow. Add leverage. I buy a loan from a number RE businesses, but I don't just use the money in my pocket. I borrow it from the bank at a lower rate than what I receive from Evergrande. They go bust, bank asks me for money, I need to sell my other loans in the RE firms. Those loans will go down in value, reflecting higher rates and making it harder for the firms. This credit cycle is described by Soros in his books. Works both ways actually, when things are good it's the reverse.
- technofiend 5y ago
  That's the gentle dominoes falling version. Then there is the version where lending institutions completely rethink the risk in that sector. In that version they call loans and stop extending credit to same or similar businesses overnight. When Enron collapsed every other energy trading firm lost access to trading capital, taking out the entire sector. Whether or not energy companies should have been speculating in the futures market with borrowed money is a separate conversation.
  - vlovich123 5y ago
    Maybe it’s not a separate conversation? Maybe you shouldn’t be allowed to speculate on the futures in your company’s sector?
- DebtDeflation 5y ago
  > One firm defaults, all their investors lose a bit of money. Now that they've lost a bit of money, they will have less money to lend to other firms. There's a lot more to it than that. You have to take into account 1) We have a fractional reserve banking system. When banks start individually calling in loans, there isn't enough "money" in the system for everyone to repay them. 2) Asset market prices (e.g., equities) reflect the present discounted values of expected future earnings. When everyone suddenly expects those future earnings to be less, the prices of those assets fall precipitously. That's not an issue in and of itself, except that those assets may have been purchased on margin (a loan) which depends on the value of those assets and may suddenly be called in for payment, forcing a liquidation of the underlying assets and further price falls. 3) As businesses scramble to pay loans that have been called and to adjust to a market where credit is difficult to come by (and businesses run on credit not cash) they reduce costs and often do so by laying off workers. This causes a reduction in aggregate demand (worker income) across the economy which further exacerbates the problem. There is inherent instability in the system and all sorts of positive feedback loops that can amplify an initial shock. Suggest reading Irving Fisher and Hyman Minsky to understand more.

mensetmanusman 5y ago

Apparently employees were told to invest in the company or they would be denied payment/bonuses. Feel sorry for everyone involved in this dumpster fire.

giansegato 5y ago
Sounds eerily similar to what happened during the Enron saga. So many employees tricked into keeping all their pension savings into the stock. Quite a sad story.
- danpalmer 5y ago
  It's sad, but I think "tricked" is a simplification. Being tricked into thinking it was safer than it was, yes, but being tricked in order to boost the share price or maintain the company, I'm not so sure. Even towards the end the CEO was taking out personal loans secured on his Enron shares... in order to buy more Enron shares. This was a big contributor to the snowball effect when the share price started falling. I think the top people at Enron honestly believed in the stock and were probably mostly pushing it for employees on this basis. That was pure hubris, thinking they were smarter than everyone else. They should have known better and some were rightfully prosecuted for their part, but it's a bit more complicated than saying the employees were "tricked".
  - mlac 5y ago
    The WSJ did a fantastic podcast on this recently called Bad Bets. If there is any interest it is worth a listen.
- refurb 5y ago
  What are “pension savings”? When I had a corporate pension it was an obligation of the company that I had zero say in.
  - mikeyouse 5y ago
    Yeah OP called it a pension when it was really a 401(k) — but Enron had some sort of setup where employees could choose to buy Enron shares at a discount into their 401(k) but importantly, Enron’s “employer contributions” were also in the form of Enron stock, which couldn’t be sold by the employee until they turned 50. Then when the company started failing, they instituted a trading blackout so employees couldn’t sell their stock for weeks before the bankruptcy. Of course, there was a corporate pension as well that failed and was was also largely in Enron stock. So now those liabilities are owned by the PBGC.

Kye 5y ago

Copying my comment from the previous thread where it was maybe-defaulting: https://news.ycombinator.com/user?id=Kye https://news.ycombinator.com/user?id=Kye -- Some good explanatory threads I saved when the Evergrande news first broke a couple of months ago: https://twitter.com/SahilBloom/status/1439920043404546050 https://twitter.com/SahilBloom/status/1439920043404546050 https://twitter.com/FabiusMercurius/status/1439218956779151361 https://twitter.com/FabiusMercurius/status/14392189567791513... https://twitter.com/INArteCarloDoss/status/1438944431734919175 https://twitter.com/INArteCarloDoss/status/14389444317349191...

teddyh 5y ago
That thread is here: https://news.ycombinator.com/item?id=29178102 https://news.ycombinator.com/item?id=29178102

mattbrewsbytes 5y ago

Will the People's Bank of China be paying Evergrande's foreign debts (aka bonds)? How many derivative products were created off those in other markets? Will it be as bad as 2008/09 when Mortgage Backed Securities and their derivatives collapsed except this time it is Commercial Mortgage Backed Securities? Just asking questions in case anyone closer to those business areas wants to chime in. I doubt there is transparency coming out of China about this.

EarthIsHome 5y ago
I think it's pretty clear that China isn't going to bail them out like how the US bailed out our failed companies back in 2008. China cares more about protecting the homebuyers and contractors who are building the homes more than protecting the investors [0][1]: > Evergrande has almost 800 projects across China, many of them funded by advance payments from homebuyers. > Local governments have ringfenced homebuyer deposits and other funds to ensure that Evergrande projects in their jurisdiction are completed and contractors paid on time. So this is a much different reaction than the US government who protected the investors and banks. [0]: https://www.ft.com/content/6d6b1f79-52b3-49e5-aa8a-7068adec7a9d https://www.ft.com/content/6d6b1f79-52b3-49e5-aa8a-7068adec7... [1]: archive.is link of [0] https://archive.ph/GKWmv https://archive.ph/GKWmv
- starfallg 5y ago
  >So this is a much different reaction than the US government who protected the investors and banks. It was mainly to prevent systemic collapse of the financial system. Banks and other financial institutions profiting from it is an 'unfortunate' side-effect.
  - kmlevitt 5y ago
    Why couldn’t they have prevented the systemic collapse simply by bailing out the individual homeowners? If they had gotten bailed out, so would have their banks.
    - 5y ago

hericium 5y ago

I truly have thought that Xi would keep his ability to shake US market for longer.

bluedays 5y ago

I think this is going to end up having some very broad ramifications. The last time a real estate started defaulting on it's debts it create a cascade that ultimately ended in the 2008 financial collapse.

jpgvm 5y ago
This is very substantially different. The real problem with 2008 was all the banks were leveraged to the tits on mortgage backed securities. Chinese banking system on the other hand is very conservative and the banks are state owned. The problem wasn't real estate developers getting shreked but rather the financial institutions the underpin everything suddenly facing massive liquidity crisis and enormous losses as MBS plummeted. I fully expect a bunch of over-leveraged Chinese RE developers to fold here but I don't expect further contagion unless there is something unaccounted for - like international institutions being overly exposed to bad Chinese RE debt or something.
- papito 5y ago
  Well, we are going to find out if Tether is exposed to it, won't we. Big, if true, and it would set off a nuclear bomb under crypto.
  - jpgvm 5y ago
    Eh, crypto imploding will have zero net impact on anything important. I understand why crypto crew care but I don't get why anyone else would.

throwaway69123 5y ago

Good.

captainmuon 5y ago

Maybe someone with more knowledge can explain this to me. When they defaulted, that means that they failed to pay back one of their debts, it does not mean that they are completely out of money, right? What stops them from selectively defaulting? Stop paying back some of the politically less important debts, and continue chugging on, servicing only certain debtors. I'd assume with unlimited political backing this should not be a problem. OTOH I read somewhere that the political leadership is not amused and wants to make an example. Also, I would say China has benefited a lot from the international financial system and from the rules of international commerce, so they probably have to honor international debts.

sbarre 5y ago
From reading the article, it seems they need to raise more money to actually resume many of their construction projects (which is where their revenue comes from), and because they are unable to repay existing debt, no one else wants to give them money.
- vesinisa 5y ago
  Which is hardly surprising, given how insane the Chinese real estate bubble is. I understand there are entire ghost cities of extensive high-rise developments - sitting largely abandoned and owned as vacant second homes by Chinese private investors waiting to sell them on a profit thanks to an urban migration that might never happen. Edit: I don't know why am I being downvoted. The Chinese real estate bubble has been rather well-documented, see e.g. this YouTube video: https://youtu.be/EgVXRtq5EIg https://youtu.be/EgVXRtq5EIg
  - pjc50 5y ago
    Yes, this is basically Anglo-Irish Bank on a much larger scale.
api 5y ago
That seems right. When people get into money trouble they will start skipping some debt payments first. The mortgage or rent is usually last to skip for obvious reasons.

thedudeabides5 5y ago

My hot take on this. Yes it matters Yes there will be contagion No it won’t stop until the government (Xi and PBoC) agree on how bad it will get before they start bailing others out. Now that too big to fail is dead in China, expect more failures, basically. https://t.co/TXNfUdoVi5 https://t.co/TXNfUdoVi5

VortexDream 5y ago
You realize that they've already repeatedly said they'd "bail out" people and groups affected by this? They just weren't willing to reward Evergrande's reckless behavior by giving them more money. Something the US should've done (so much for free market capitalism as a principle).
- deleted 5y ago
  [deleted]
- candiddevmike 5y ago
  I don't think it's clear yet if they plan to bail out everyone or just Chinese-based people and groups. From my understanding, evergrande had a lot of international investors.
  - Kinrany 5y ago
    Regardless of whether China does it, bailing out the debtees and letting the debtor fails is what other countries should do in the future.
    - littlestymaar 5y ago
      That doesn't bring better incentives that bailing the debtor out: it still encourage to lend money recklessly.
      - Kinrany 5y ago
        This creates at least one agent that will directly suffer the consequences of the default they caused. Of course one can create two companies, make the first borrow from the second, make the second hide the money and default, get the first bailed out and pocket the hidden stash. But they'll be easier to go after.

danlugo92 5y ago

Tether's headquarters must be on fire right now.

JohnJamesRambo 5y ago
“Tether does not hold any commercial paper or other debt or securities issued by Evergrande and has never done so. As we have indicated in our published statements and our most recent assurance attestation with a reporting date of June 30, 2021, the vast majority of the commercial paper held by Tether is in A-2 and above rated issuers.” Is there something I don’t know or are you just repeating stuff you think you know?
- loeg 5y ago
  Tether’s operators have a history of repeatedly lying, though. It’s certainly possible they don’t hold any Evergrande debt, but it’s also possible they do and are just lying about it.
- pjc50 5y ago
  Nobody knows anything about Tether reserves, and nobody will admit to being their counterparty or even their broker, so Evergrande was just made up as a possible candidate. $72bn of mystery dark money.
  - JohnJamesRambo 5y ago
    As someone that grows weed legally in my state I do commiserate with their problems. Since weed is not legal federally if my banks ever find out the source of funds, I’m terminated instantly and asked to take my money and go. Our American Express account was terminated for exactly this reason a few months ago. I assume it is a very similar situation with Tether, since they have had banking issues in the past. Whoever they bank with would be shunned immediately by other banks and governments, as many see crypto rightfully as a competitor. But the money is too attractive so you do have banks crossing that line to help, on the caveat that it remain anonymous. You can’t run Tether or a weed operation without banking, so you see our conundrum.

gvv 5y ago

Any educated prediction on what the consequences of this might be for the rest of the world? Will the Bank of China bail them out like the US government did in 2008?

globalise83 5y ago

Interesting. This is the biggest developer in a sector worth 29% of China's GDP. If they can fail, so can all the other ones. Who would invest in Chinese real estate now, and where is the needed 8% plus GDP growth needed by China to meet its annual targets going to appear from?

Hokusai 5y ago
> Who would invest in Chinese real estate now It's not that true for Western countries after the 2008 financial crisis? It seems to not have stopped housing bubbles.
- redblacktree 5y ago
  The biggest US real estate developers don't appear to be on the verge of default, no.
Bayart 5y ago
>Who would invest in Chinese real estate now The Chinese. Real estate is really the only investment open to the middle class. Property owners have on average nearly three properties, something stupid like that. That won't change.

FuriouslyAdrift 5y ago

Kaisa has also now defaulted... https://www.bloomberg.com/news/articles/2021-12-09/kaisa-cut-to-default-after-missing-400-million-bond-payment https://www.bloomberg.com/news/articles/2021-12-09/kaisa-cut...

polycaster 5y ago
Paywalled unfortunately
- graedus 5y ago
  https://archive.md/MW0cN https://archive.md/MW0cN
- Crosseye_Jack 5y ago
  https://github.com/iamadamdev/bypass-paywalls-chrome https://github.com/iamadamdev/bypass-paywalls-chrome Granted, the extenstion is pretty much targeted at Desktop and it really only works in Firefox without a nag screen, but yeah, its whatr I was on my own rig and I can't remember the last paywall I came across.
boringg 5y ago
Small money company - while there might be impacts to the economy the scale of these companies is small. Ripple effects contained in China. Once something happens to a US company I'll start paying super close attention.
- ganeshkrishnan 5y ago
  A major chunk of evergrande is owned by black rock and HSBC. The ripple effects will be felt beyond china. This is like saying the virus is only circulating in china. I will pay close attention when it starts in US. I think the mortgage squeeze in china is far worse than the pandemic and they have done a good job of masking it. We will know in few months or years when the shock waves ripples thru here.
  - 5y ago

ur-whale 5y ago

So, how much capital did they suck in from foreign equity market in the end? Anyone know where to find the figure?

AussieWog93 5y ago
I don't know the exact figure, but I have heard that the overwhelming majority of their debt is held by domestic Chinese investors.
- redis_mlc 5y ago
  $300 billion for Evergrande bonds from foreigners. $2T - $4T total from US capital markets, which funds BRI and the PLA. (Wall Street are literally traitors.) 91% of China's interntional trade is in USD, so cutting them off from US capital markets would be fatal economically in days.

fasteddie31003 5y ago

If you think US real estate is expensive, look at other county's income to property ratios. https://www.numbeo.com/property-investment/rankings_by_country.jsp https://www.numbeo.com/property-investment/rankings_by_count... In the US it's 4. In China it's 27. Imagine having to work over 27 years to afford a house.

bamboozled 5y ago
It's like 45 in Australia.
- aembleton 5y ago
  7.27
  - bamboozled 5y ago
    There's absolutely no way a person an an average income could buy a home in Australia and pay it off in 7.27 years. Those figures are totally wrong. Many people would be lucky to save for a deposit on a place in 7.27 years.
    - 988747 5y ago
      That's not what this statistic means. It means that if you spent 0 dollars and saved all your income you would need 7.27 years to buy a house. In practice you need a mortgage, of course. But now think how bad this gets when a house price is your 40 years worth of income...
    - nostrebored 5y ago
      This view is detached from reality. Not every house is in the eastern suburbs of Sydney and lower quartile income in Australia is extremely high.
      - bamboozled 5y ago
        I could buy a house at the end of a run way for cheap, or in a desert, but no one wants to live there.

paulpauper 5y ago

Bitcoin , which is supposed to be a hedge against uncertainty and inflation, going the opposite direction of S&P 500 despite virus, china, and inflation. goes to show how useless common narratives often are.

echelon 5y ago
Tether is said to not have 1:1 backing with USD and instead have exposure to Evergrande bonds. Nobody knows the veracity of this claim, because the organization itself is tight lipped, but it is posited by some critics. If Tether collapses, it could result in widespread blowback against the entire crypto market. There's also increased regulation in India and broader skepticism. Crypto is feeling anxious right now, and many are harvesting their gains based on the uncertainty.

pezzana 5y ago

From Bloomberg: > Bondholders of $19.2 billion in Evergrande dollar notes face deep haircuts as the company overhauls its mammoth balance sheet without a government bailout -- a process that promises to be long, contentious and potentially risky for Asia’s largest economy. https://www.bloomberg.com/news/articles/2021-12-09/evergrande-defaults-for-first-time-as-china-debt-strains-spread https://www.bloomberg.com/news/articles/2021-12-09/evergrand... It might seem odd that a Chinese company would have taken out dollar loans, but the practice is common around the world. One reason is that the borrower can get lower interest rates because they assume the exchange rate risk themselves. If that bet goes sour, though, the borrower faces higher costs to service the debt. Of course the thing about dollar bonds is that even if the national government were to intervene, those dollars can't be printed by Beijing. The only way to service a dollar debt is to raise dollars. One path to doing that is to sell dollar-denominated assets. US Stocks and bonds in other words. So the pressures in China can spill over into the US economy through forced asset sales of dollar-denominated assets. This is another angle to the contagion idea. Organizations around the world have taken big short position on the US dollar. As those loans come due, dollar assets are sold. Which drives the dollar higher. Which makes the dollar loans even more unsustainable. And so on. It has been called the global dollar short squeeze: https://www.lynalden.com/global-dollar-short-squeeze/ https://www.lynalden.com/global-dollar-short-squeeze/ And if you're really adventurous, there's something called the "dollar milkshake theory" which predicts the uncontrollable rise of the dollar as (maybe counterintuitively) a wrecking ball for the world economy: https://www.youtube.com/watch?v=2qTOWuL7Zco https://www.youtube.com/watch?v=2qTOWuL7Zco

peter_retief 5y ago
The world economy is in trouble, the US has leadership issues and China has declining growth. Inflation will soon strip away any gains in growth. Hold onto your seat.
- toss1 5y ago
  Yes, except this type of event is massively DEflationary. Creation of more debt is creation of more money, increasing supply, and is inflationary. Conversely, destruction of debt destroys money, and is deflationary, in this case, deflationary to the dollar. Also, selling of dollar-denominated assets also decreases the dollar-value of those assets and so increases the value of the dollar. But it is inflationary for the Chinese currency. This is why with the Fed's QE programs since the 2008 crash everyon ehas been yelling "Inflation!!" for over a decade, yet there was none-negative until this year, and even that is arguably transient. So much money was destroyed in that crisis that they have been ever since then trying to fill in the (deflationary) hole. To the extent that that debt is denominated in dollars and is about to be destroyed, it will be dollar-deflationary, not inflationary.

steve76 5y ago

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mkoryak 5y ago

Does this mean that houses will finally become a bit more affordable in the US?

NelsonMinar 5y ago

Might be a rough week for Tether and therefore all cryptocurrencies. Tether's finances are murky af but it's widely understood they hold a lot of Chinese commercial debt. Not Evergrande specifically. https://cointelegraph.com/news/did-conflicting-reports-about-evergrande-defaulting-cause-bitcoin-to-tank https://cointelegraph.com/news/did-conflicting-reports-about...

boringg 5y ago

Evergrande defaults, contagion in China - ripple effects in china. Global media needs a story line to rattle the market, traders make money on the news. The world rolls on - it's not big enough to be a major problem. China can absorb this one. Now if the entire real estate in China goes south - thats a global problem and a huge political issue. That would signal that we might be on a warpath as the party would need to stabilize the economy with some kind of threat narrative or risk being run out of office. This is *highly speculative* of course.

deleted 5y ago

[deleted]

anm89 5y ago

I personally think people misunderstand this story. It's not a Lehman like structural issue. It's a consumer confidence issue in the Chinese real estate bubble and public finance issue relating to how Chineee municipalities finance normal operations via land sales through special purpose vehicles. Basically if Chinese people stop believing houses are an endless fountain of money they Chinese government is in an enormous mess and this seems to be a step towards that happening.

1270018080 5y ago
It sure seems like a structural issue when Chinese people are paying 10x as much for a condo on 10% the salary as someone would here.