Will the Fed back down after Evergrande, and what about the bigger risk? Here is the answer


© Reuters.

Investing.com – The Chinese real estate giant’s crisis seems to have crossed the line after sharp losses in the US and European stock markets, everyone is watching with caution and fears that it will turn into a snowball sweeping all over the country.

Wall Street indices closed trading on Monday with violent declines, with losses exacerbated by the increasing fears associated with the bankruptcy of the Evergrande, whose debts exceed more than 300 billion and are exposed to nearly 240 banks and financial institutions.

But will this crisis affect the US Federal Reserve’s decision to reduce asset purchases… Will the Fed’s policy change, and what about the greater danger facing the United States?

Pierre Verrett, technical analyst at ActivTrades, said: “There are several influences that have pressured market sentiment, with the debt crisis in the world’s two largest economies, China’s Evergrande Group (HK:) and the US debt ceiling.

you won’t be late

William Dudley, the former president of the Federal Reserve Bank of New York, said concerns about China’s real estate sector roiling global stocks wouldn’t stop the Fed from signaling it was on its way.

“They will not react to small market movements and postpone tapering on that basis,” said the former New York Fed president.

“They have to change their economic outlook, at this point, it’s really too early to come to that conclusion,” Dudley said during an interview on Bloomberg TV with Lisa Abramovich, Tom Keene and Jonathan Ferro.

US stocks followed other European indices all lower on Monday as investors were alarmed by the risk of contagion from the debt crisis at developer Evergrande Group.

next november

What is happening in China is important to the global and US economy, Dudley said, and he expects that federal officials meeting this week will still signal that they are on track for a gradual decline at their November meeting.

Dudley said the Fed should be a little more flexible about when to raise interest rates in order to reassure Americans that it intends to keep inflation under control.

“If inflation expectations really become unproven, that’s a problem for actual inflation and I think they’ll have to respond,” Dudley added.

On the other hand, if more officials anticipate a rate hike next year, “it may reduce concerns about a Fed delay,” Dudley said.

Policy makers will release their latest quarterly forecast along with the policy statement at 2 p.m., in Washington on Wednesday, including a new point chart for interest rate expectations to 2024.

It will not turn into a new Lyman

Mohamed El-Erian, former CEO of PIMCO and chief economic advisor at Allianz, said Monday that concerns about defaults at China-based real estate firm Evergrande have not reached the “Lehman moment.”

However, El-Erian told CNBC that a crisis in the Evergrande “shakes the main principles of this global investment topic.”

Specifically, the former CEO of PIMCO has argued that the uncertainty surrounding Evergrande undermines the assumption that governments will always step in to rescue the financial sector when a major player reaches a moment of crisis.

Some analysts believe that Evergrande will undoubtedly survive the crisis on the basis of Too big to fail, or “too big to fail”, as the government will not let the crisis escalate and must intervene.

Strategists Citigroup (NYSE:), Barclays (LON:) and UBS Group say the debt crisis of the world’s most indebted real estate developer, China Evergrande Group, is unlikely to become a Lehman moment for for China.

Barclays sees the market environment as not similar to what happened during the Lehman Brothers meltdown, UBS notes that the levels of default are too low for the size of the Chinese economy, and Citi expects policymakers to step in.

While Jefferies Financial Group also sees low potential for systemic risk from Evergrande, it advises investors to buy bank stocks when they dip.

China will not interfere

Standard & Poor’s Global Ratings said the Chinese government was unlikely to step in to provide direct support to the debt-laden developer.

“We do not expect the government to provide any direct support to the Evergrande, we believe that Beijing will have to intervene only if there is a long-term contagion that causes the failure of many major developers and poses systemic risks to the economy,” the credit rating agency’s analysts added.

Evergrande has commitments of about $300 billion, and it is scheduled to pay interest payments on bonds starting next Thursday, but it indicated that it is possible that the company will default on those payments.

It is reported that “Evergrand” Chairman Hui Ka tried to reassure the markets Tuesday in a letter to employees, and said that the company will fulfill its responsibilities towards real estate buyers, investors, partners and financial institutions.

Some analysts believe that Evergrande will undoubtedly survive the crisis on the basis of Too big to fail, or “too big to fail”, as the government will not let the crisis escalate and must intervene.

“Evergrand” is exposed to about 128 banks and 121 non-bank financial institutions, which prompted the People’s Bank to warn that the Evergrande may constitute a source of danger to the entire Chinese banking and financial system.

Evergrande, which owes more than $300 billion, said Sunday it has begun paying off wealth management products to investors through real estate.


Standard & Poor’s Global sees a default by debt-laden Chinese real estate developer China Evergrande could test the government’s ability to support potentially large failures.

“The events could shake broad investor confidence in the Chinese real estate sector,” said Matthew Zhao, a credit analyst with the agency.

The difficulties Evergrande is facing come as China Horang Ast Management is in the midst of a recapitalization process.

“This means that two of China’s largest issuers of foreign debt are testing the government’s ability to support potentially large failures,” Zhao said.

greater danger

US Treasury Secretary Janet Yellen said: “Next October, the Treasury’s cash balance will fall to a level that is insufficient to meet commitments and the government will not be able to pay its bills.”

“The United States has always paid its bills on time, but the overwhelming consensus among economists and Treasury officials on both sides is that failure to raise the debt ceiling will lead to widespread economic catastrophe,” Yellen added.

“Within days, millions of Americans could be in financial trouble, and we could see unlimited delays in critical payments,” she said.

“Social Security checks may not be delivered to nearly 50 million seniors for some time,” Yellen said.

“Millions of families who depend on the monthly childcare tax credit may face delays in the credits,” Yellen said. “In short, the United States will default on its commitments.”

So wrote Janet Yellen, the US Treasury secretary, in an opinion piece for the Wall Street Journal. Yellen cautioned that failure to meet financial commitments “is likely to precipitate a historic financial crisis that will compound the damage from the ongoing public health emergency.”

Which will lead to a suspension of Social Security payments, delays in the monthly tax credit payments to families and we will likely have to raise interest and cause stocks to fall.


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