If you're wondering what the hell Evergrande is, it's the second largest real estate developer in China. Let me explain in some nuance if you are wondering how this relates to Tether. Also, remember to check out the bottom of this post for an update.
Evergrande is also China's largest issuer of commercial paper. These are very short-term corporate bonds. It earned this title after the Chinese government banned the company from issuing longer-term debt. In addition, Evergrande is now well on its way to bankruptcy as creditors have pooled their resources and taken the company to court to settle their debts - something that often precedes a bankruptcy filing. Evergrande is taking steps to regain liquidity, even selling its headquarters, but there seems to be no hope of that happening.
Evergrande is about $305 billion in debt - for comparison, Lehman Brothers had about $619 billion in liabilities and its fall triggered the 2008 financial crisis.
Now in the crypto context, in case you hadn't guessed, Tether's USDT, which tracks the value of the U.S. dollar, is backed by a significant amount of Chinese commercial paper. In fact, Tether claimed earlier this year that 50% of its reserves are held in the form of commercial paper. How much of that is Chinese or specifically Evergrande is unclear. The sheer fact that Tether is not clearing up these suspicions could lead 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 time bomb" after anonymous "Chinese sources" told him that most of the commercial paper was actually Chinese.
As a reminder, USDT accounts for nearly 80% of the volume of all crypto transactions. If the commercial paper backing Tether fails, the real value of USDT could fall below its peg of $1. Some also speculate that the Tether team could sell its substantial crypto holdings (including bitcoin) to cover its commercial paper losses, accelerating a massive crash as liquidity simultaneously shrinks. Also, if USDT falls below $1, stop-loss orders on crypto pairs that include USDT may not be triggered despite the fall in the value of an asset (as long as the value of USDT falls 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. In that case, China would have to settle the debt in U.S. dollars, not Chinese yuan. This is important because Beijing would then be forced to buy more than $300 billion, driving up the value of the dollar. This could then lead to an overnight "haircut" for all asset classes as the dollar rises, including both crypto and stocks.
So either through bankruptcy or bailout, this event could shake the financial markets and crypto seems particularly vulnerable. There are many uncertainties, especially China's reaction to this situation and the extent of Evergrande's actual exposure, but you would be wise to monitor this situation and consider how it affects 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.
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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