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1/8
Good article by @anjani_trivedi on what the recent bond defaults tell us about growing credit stresses within China. Those of us who have been watching this game for a long time know that every time we get some similar disruption in the credit... https://www.bloomberg.com/opinion/articles/2020-11-18/china-s-next-big-default-pressure-point-local-debt-vehicles
Good article by @anjani_trivedi on what the recent bond defaults tell us about growing credit stresses within China. Those of us who have been watching this game for a long time know that every time we get some similar disruption in the credit... https://www.bloomberg.com/opinion/articles/2020-11-18/china-s-next-big-default-pressure-point-local-debt-vehicles
2/8
markets, we all get very worried that this is the time in which "it" could happen.
But we have always to remember three things. First, it is very unlikely that this will be the time "it" happens. Any default large enough to convince investors that default risk is...
markets, we all get very worried that this is the time in which "it" could happen.
But we have always to remember three things. First, it is very unlikely that this will be the time "it" happens. Any default large enough to convince investors that default risk is...
3/8
a real risk will also cause a disruptive and chaotic repricing of markets. Regulators know this must eventually happen, but it is always easy to justify postponing it a little longer, and they still retain the credibility and firepower to do so.
a real risk will also cause a disruptive and chaotic repricing of markets. Regulators know this must eventually happen, but it is always easy to justify postponing it a little longer, and they still retain the credibility and firepower to do so.
4/8
Second every time they postpone "it" from happening, the likelihood that the next disruption is when "it" will happen rises. That's because each time they do so undermines both their credibility and their firepower. The stability in financial markets that regulators...
Second every time they postpone "it" from happening, the likelihood that the next disruption is when "it" will happen rises. That's because each time they do so undermines both their credibility and their firepower. The stability in financial markets that regulators...
5/8
impose, as Hyman Minsky famously explained, is itself destabilizing. When regulators defuse credit stress by rescuing the borrowers, or forcing lenders to restructure their liabilities, it increases the risky behavior of the system. Put differently, every time...
impose, as Hyman Minsky famously explained, is itself destabilizing. When regulators defuse credit stress by rescuing the borrowers, or forcing lenders to restructure their liabilities, it increases the risky behavior of the system. Put differently, every time...
6/8
investors get paid excessively to ignore risk, they respond by taking on even more risk.
Third, and most importantly, it is the willingness of investors to ignore credit risk that underpins high growth in the economy. If investors were only willing to fund productive...
investors get paid excessively to ignore risk, they respond by taking on even more risk.
Third, and most importantly, it is the willingness of investors to ignore credit risk that underpins high growth in the economy. If investors were only willing to fund productive...
7/8
activity, Beijing would not be able to count on local governments to fund enough economic activity to bridge the gap between the real underlying growth rate of the economy and whatever the targeted amount of economic activity Beijing needed to achieve its politcal...
activity, Beijing would not be able to count on local governments to fund enough economic activity to bridge the gap between the real underlying growth rate of the economy and whatever the targeted amount of economic activity Beijing needed to achieve its politcal...
8/8
objectives (including generating employment). Allowing "it" to happen, in other words, not only means financial disruption, it also means the end of GDP growth targeting. All the more reason for the regulators to try to resolve credit stress.
objectives (including generating employment). Allowing "it" to happen, in other words, not only means financial disruption, it also means the end of GDP growth targeting. All the more reason for the regulators to try to resolve credit stress.
