Specialists afraid of the next credit crisis
Interbank lending is showing increased risk of a new credit crisis. Lending between major banks is about to seize up, causing debt markets to fall over. The quantitative easing coming from the ECB (European Central Bank) may buy time, but looks like it can’t prevent the outcome.
The banking crises that took place in 2008 was the result of house prices collapsing in 2007, so it would be easy to blame the American homeowners. However, it would be wrong. The crisis was not cause by the housing market collapse, which was also just a symptom of low risk, cheap credit being too accessible.
The second economy crisis is slowly starting to happen, but this time not in the US, but in China. The economy in China that had been steadily growing for the last two decades is now slowing, with last year being their weakest with only 7.4pc growth. The real estate sector in China has busted and id dragging down the whole economy.
The crisis is already unfolding and Chinese property companies’ bonds are falling quickly. Last week, once a top real estate developer Shenzhen, Kaisa, was bailed out by Sunac after ending up in debt. As the problem spreads, other companies such as Fantasia and Glorious Property have been sold off as well.
Chinese government is trying to keep the situation under control. But the entire credit system is unsustainable in China. They would have to print new money constantly to refinance the existing one.
Chinese banks are also worried about lending from each other. US banks, including HSBC and Standard Chartered have increased their operations in China and Asia rapidly. It is easy to get loans, but tricky for the lenders to get back their money.
The fact that it is happening in China doesn’t protect the rest of the world as the contagion will spread from Chinese banks to British and American banks quickly. In the UK, the risks of lending among banks is also rising, but that’s not all. Global debt is now at $200 trillion, having gone up from just $57 trillion 8 years ago.
This monetary expansion is being led by China with around 5 billion dollars, but Chinese are closely followed by the US Federal Reserve, Bank of England and even Japanese banks. In this new light, the stocks of tech companies have risen fast, but equities markets are soaring.
New, bizarre assets have emerged, such as Bitcoin, which is gaining thousands of investors every week. And they don’t even have the backing of a central bank. However, by now, Bitcoin has collapsed. So have oil and iron ore, oil falling from $115 in June to $52 by last week and iron falling from $140 in January 2014 to $62 by last week.
Other indicators to show how the world’s economy is growing are all showing red lights. The Baltic Dry Index was at the lowest of 29 years with 559 points last week.