Evergrande is a Step Closer to Default. How Will that Affect the Markets?

Evergrande is a Step Closer to Default. How Will that Affect the Markets?

Following last week’s stock market selloff on the news that Evergrande will default, global markets recovered most of their losses.

On September 23, Evergrande missed a USD 83.5 million bond payment. Still, markets shrugged it off as it coincided with the People’s Bank of China (PBOC) move to inject USD 18.6 billion in the banking sector, which hinted that policymakers are willing to intervene to avoid a market fallout.

The next big test or series of tests is closing in. On September 29, Evergrande has another interest payment worth USD 47.5 million on the 20.5% Dollar bond that matures on March 2024.

Missing the upcoming payment could cause a ripple effect on markets, considering that on October 11, the company will have to meet an additional three interest payments. Each one of these payments has the chance to create a surprise in markets.

An Evergrande default looks inevitable, and at this point, the company is unlikely to be able to prevent it. The pessimistic scenario will be total default and the consequent bankruptcy of Evergrande. This will allow panic to enter not only the Chinese market, but also global markets.

Domestic and international investors will lose confidence in the Euro bond, Dollar bond, high-yield, and Chinese real-estate markets, which will cause risk premiums to grow even more, and a fire sale to occur.

Investors have already shown signs that they will react to negative news from Evergrande. Should the negative sentiment kick in, we expect a selloff across high-yielding bonds, equity markets, and cryptocurrencies.

Over the past two days, its shares have been recovering after losing more than 80% since the start of 2021. Another surprise would be that Evergrande pulls a rabbit out of its hat and starts repaying its coupon payments.

Meeting the upcoming few payments will boost the company’s shares, allowing the rest of China’s real estate market to sort out their priorities to avoid any contagion effects from Evergrande.

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