USDT might get blown up by Evergrande and you should know why (UPDATED)

USDT might get blown up by Evergrande and you should know why (UPDATED)

By SirK133 | CryptoCat | 15 Sep 2021


If you wonder what the heck Evergrande is, that's China’s second-largest property developer. If you now wonder how this connects to Tether, please let me explain this in some nuance. Also remeber to chceck the bottom of this post for update.

Evergrande is also China’s largest issuer of commercial paper (very short-term corporate bonds). It earned this title after the Chinese government banned the company from issuing longer-term debt. Also, Evergrande is now well on the path to bankruptcy, since creditors have pooled their resources, taking the company to court in an attempt to settle their debts – something that often precedes a bankruptcy declaration. Evergrande is taking action to regain liquidity, even selling its corporate headquarters, but there seems to be no hope of that happening. Evergrande is roughly $305 billion in debt - for comparison, Lehman Brothers  had around $619 billion of liabilities and its fall triggered 2008 financial crisis. 

Now onto the crypto context, if you have not guess it already, Tether's USDT that tracks the value of the US dollar is backed by a significant amount of Chinese commercial paper. In fact, Tether claimed earlier in the year that 50% of its reserves come from commercial paper. How much of it is Chinese or specifically from Evergrande is unclear. The shear fact that Tether is not clearing this suspicions might cause cautious investors (especially institutional ones) to believe that the risk is high.CNBC’s Jim Cramer went so far as to call Tether a “ticking timebomb” after anonymous “Chinese sources” told him most of the commercial paper was in fact Chinese.

As a reminder - USDT accounts for almost 80% of the volume of all crypto transactions. If the commercial paper that backs Tether fails, the actual value of USDT could plunge below its peg of 1 US dollar. Some also speculate the Tether team could dump its sizable crypto holdings (including Bitcoin) to cover its commercial paper losses, hastening a massive crash as liquidity simultaneously shrinks. Also if USDT falls below 1 USD, stop loss orders on crypto pairs that include USDT might not trigger despite the fall in value of an asset (as long as value of USDT will be falling comparably). 

This outcome assumes that China allows Evergrande to go bankrupt.

If the Chinese government bails out Evergrande instead, Beijing would become the company’s newest business partner. Should this happen, China would need to settle those debts with US dollars, not Chinese yuan. This is important as Beijing would then be forced to buy over $300 billion dollars, spiking the value of the dollar in the process. That could then lead to an overnight “haircut” for all asset classes as the dollar surges, including both crypto and equities. 

So, either by way of bankruptcy or bailout, this event might shake financial markets and crypto seems especially vulnerable. There is a lot of uncertain circumstances, mainly China's reaction to this situation and the extent of actual Tethers exposure to Evergrande papers, but you would do smart to monitor this situation and think ahead how it involves your positions. 

UPDATE 19.09.2021 Since I belive sprading the doomsday news should be done with some reponsibility here is an update on this messy situation.

First of all, Tether took a stance on this matter: “Tether does not hold any commercial paper or other debt or securities issued by Evergrande and has never done so,” said a spokesperson for Tether. “As we have indicated in our published statements and in 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.” So my assumptions about Tether being especially as risk might not be that accurate, but I feel it is too soon to rejoyce - as I tried to find out who holds Evergrande bonds I had trouble accesing solid data, but found mentions in articles that main holders include "world's biggest asset manager BlackRock, as well dozens more such as Fidelity, Goldman Sachs asset management and PIMCO". For me, this means that it is hard to estimate what "commercial papers" are at risk since this is a highly intertwined system and I can only wish that traditional finances had such cool and clear "block explorers" as we have in DeFi ;)

“There is the stark reality that [a possible collapse] will have a huge impact on the commercial paper markets. Regardless of what commercial paper you hold, bonds and commercial paper would take a hit and some issuers may even fold,” tweeted Adam Cochran, partner at Cinneamhain Ventures.

Still I'm glad Tether claims they are not directly at risk here - this is a good news.

Also I stumbled uppon something so exotic I want to share it here. "Around 70 to 80 percent of Evergrande employees across China were asked to put up money that would then be used to help fund Evergrande operations" and "asked" means if they did not lend money they were stripped of bonuses for their work. Now Evergrande is offering to pay them up in disscounted real estate with discounts around 50% in some cases. Imagine your boss first extorts you for a loan, than offers to pay it back by giving you a stake in your corporate office at a discouted price - this is weird on so many levels, but also shows the level of desperation present in this case and gives food for thought how this might impact China's real estate market, including bilance sheets of other developers.

May your coins be like cats - eager to climb and unable to come down,
Cryptocat

 

All tips go to cat treats and catnip :) 
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This is not a financial advice – I’m no financial adviser, nor is this a legal advice – although I’m a lawyer. This is no advice at all, seriously, don’t take advice from random cats – the Internet is full of them! DYOR!

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SirK133
SirK133

Lawyer, analyst, crypto enthusiast, gamer, poet. I am interested in everything that makes up our world and how it is related.


CryptoCat
CryptoCat

My cat so often stomps the keyboard while I do my crypto research, I might as well make him a co-host here.

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