Financial instruments, such as banks, are necessary for every entity to function and grow their business. However, even banks and nation-states borrow to keep their operations afloat or expand. To a certain extent, debt facilitates growth and innovation. Still, this operational model can be dangerous and needs to be supervised by an empowered body to avoid mishaps that could cause global financial harm.
Cause for Concern
Evergrande was due to fail. S&P Global cautioned as early as September 2020 that China’s most indebted real estate enterprise showed severe financial risks. Fast forward to 2021: debt default is looming for Evergrande, who has amassed a dept of $300 billion. However, the company has remained silent in the past couple of days. Chinese authorities cautioned Evergrande to avoid a bond default after Thursday’s $83 million bond interest payment was omitted.
As a result of the market turmoil, the crypto market retraced after Tether reports surfaced, indicating the stablecoin might hold Evergrande commercial papers (CP). Regardless of that, the negative market sentiment surrounding crypto and Tether allegations, which Tether denied, generated more crypto uncertainty. However, Tether is not immune to the domino effect in the Chinese market if Evergrande truly defaults.
Evergrande is one of the many companies that’s been the victim of their own success. Twitter user Mr. Whale notes that the Evergrande case is “reminiscent of the 1997 Asian financial crisis.” The current fiasco is not singular even as financial debacles continue to emerge.
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Manipulations and Markets
Financial debt is accounted for in most economical models. However, illegalities and unethical activities increase financial risks in the market. Even banks that have previously been scrutinized for their actions continue to add terms at the border of legality. For example, JP Morgan, who’s previously denied Bitcoin’s ascendance, has settled for $15.7 million after allegedly manipulating the U.S. Treasury futures market.
JP Morgan also reached a $920 million settlement in 2020 after manipulating the precious metals treasury market. So if banks, which regulators monitor, engage in suspicious activities, what stops companies or individuals like Elon Musk from influencing the crypto market.
Michael Burry and bond king Jeffrey Gundlach have cautioned that a crash is imminent as retail investors are overvaluing both stocks as well as the crypto market. However, what’s noteworthy is the fact that companies still engage in selling “junk bonds.”
A Problem Brewing?
Newsweek’s Philip Pilkington highlighted that companies that issue junk bonds or high-yielding bonds are susceptible to market defaults and are lucrative for investors because interest rates are very high. Moreover, following the COVID-19 pandemic, the Fed started purchasing junk bonds before the market began inflating, dismissing a possible crash.
Bloomberg reports that junk bonds reached a level previously seen in the months leading up to the 2008 crash. Moreover, companies, including leading U.S. crypto exchange Coinbase started issuing junk bonds as investor interest surged. What’s more, Microstrategy also reportedly sold more than $500 million in junk bonds.
While global markets are least likely to be affected by a crypto armageddon, a failure of the crypto-economic model could spell disaster for the world economy as investors are continuously allocating part of their portfolio towards digital assets.