News

Is a “Wave of Loan Defaults” Just Ahead?

Many people who've lost jobs during the past year-and-a-half are unable to service their debt.

A June 28 article in The Hill anticipates "disastrous consequences." Here's an excerpt:

Relief programs created during the COVID-19 pandemic provided many Americans with pauses on their largest debts, particularly mortgages and student loans. Other people came to agreements with auto loan and credit card lenders about payment. This relief helped many people survive, freeing up money to pay for necessities.

But forbearance does not equal forgiveness. People will have to face the debt obligations that come with mortgages, auto loans, credit cards and student loans. Yet in the interim, people have faced persistent unemployment and depleted what little savings they may have had. Many will likely be unable to resume all of their regular debt payments. And people who did not need forbearance during the pandemic may find themselves in danger of defaulting on their debts.

The pandemic disproportionately harmed communities of color, particularly Black women. Given these households' pre-existing wealth disparities, Black Americans and other minorities are likely to bear the brunt of the economic fallout of the pandemic. Part of this fallout will be a need to ask their lenders for loan modifications.

The Centers for Disease Prevention and Control recently extended the eviction moratorium through the end of July in hopes of preventing mass evictions and of giving states time to figure out how to deliver rental assistance. Similarly, a wave of loan modification requests for the range of consumer debts is coming. Lenders presently are not ready for this barrage, which will have disastrous consequences for families and for the economy.

The 2008 financial crisis showed us how poorly prepared many lenders were to offer successful debt workouts...

Speaking of the "danger of defaulting," the June Global Market Perspective, an Elliott Wave International publication which covers 50+ worldwide financial markets, mentions China as well as the U.S.:

The rise in global interest rates is in its early stages. The yields on short-dated U.S. Treasuries and, ironically, junk debt remain historically low. Low rates have led many companies to issue copious amounts of debt, particularly in China, which has the world's second largest bond market after the U.S. Over the next 12 months alone, a whopping $1.3 trillion in Chinese corporate bonds will reach maturity. According to Bloomberg, that's "30% more than what U.S. companies owe, 63% more than all of Europe and enough money to buy Tesla, twice over." All this debt is maturing while Chinese borrowers are defaulting at a record pace. In October, the Global Market Perspective discussed the burgeoning default rates on Chinese bonds, which were negligible until 2014. The country's onshore defaults have now exceeded 100 billion yuan ($15.5 billion) for four consecutive years and are on track for another record in 2021. In 2015, a year that included a 45% decline from June to August in China's stock market, defaults totaled just 8.9 billion yuan.

In the U.S., the level of outstanding corporate bonds is the highest in history at approximately $10.6 trillion, representing nearly 50% of annual U.S. GDP. As shown on the chart at right, U.S. bankruptcies in the first quarter of 2021 and all of 2020 were above the 13-year average. In March, there were 61 announced corporate bankruptcies, the highest total since July 2020. If companies are defaulting in record numbers in China and at above average levels in the U.S. with interest rates at historic low levels, what will happen when rates rise appreciably? An ebullient social mood has led companies to believe they can issue and service ever-rising levels of debt and investors to think that default risk is transitory. As the new uptrend in rates gathers steam, however, defaults will skyrocket to record levels, and many corporate bonds will lose value.