Evergrande needs to make interest payments on Thursday, including a coupon worth $ 83.5 million.. Danske Bank economists believe they cannot afford payments could trigger further contagion in Chinese markets with some contagion in global markets.
Chinese government will finally intervene
“One scenario is that Evergrande ends up bankrupt, but that the government tries to call the company to avoid contagion. This could be done by ordering state banks to buy high-yield bonds on the market and in bond issues by other developers. And for state banks to lend developers enough money to prevent others from defaulting. Once the government shows its hand in the market, other investors will likely step in and buy credit bonds again. There could be a big profit if the yields on the credit bonds subsequently decline from the current high levels. “
“A worst case scenario is that Beijing does not intervene. That could lead to a serious crisis, as domino effects would lead to a financial crisis. An intermediate scenario would be that they intervene but very late and that the global financial markets and the global economy have a big impact before things change again. “
“Our baseline scenario is that Evergrande defaults this week and things will get worse before it improves. Timing of improvement is very difficult, as it depends on 1) how bad markets develop and 2) on Beijing’s patience before intervening. “
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