World Heading into Chain of Defaults

World Heading into Chain of Defaults


Lebanon has stated that it is unable to meet its obligations under public loans. After panic selling in the markets, experts started to talk about a chain of possible defaults around the world. However, a new global crisis is too early to be discussed.

A series of defaults worldwide has been predicted. It started off in Lebanon. The maturity date of bonds worth $1.2 bln came on March 9. Public debt in Lebanon reached 170% of the GDP, becoming one of the heaviest in the world. In 2019, when capital inflows slowed down and waves of protests against corruption and poor management began in the country, Lebanon’s financial crisis reached its acute phase.

RBC reports that it was the first default in the history of Lebanon. Apparently, it does not seem to be the last one, if you take a look at other countries. Thus, David Stubbs, head of the market department at J.P. Morgan International, said in an interview with the Ukrainian news portal Dzerkalo Tyzhnia (Mirror Weekly) that several other countries will soon default on their obligations.

Stubbs did not specify which countries he meant. He noted that fines for failure to meet obligations to creditors had recently become lower. Additionally, the default itself is a problem for those who loaned money.

“As a rule, the problem of a country is not a default itself but, rather, the causes that brought it about,” he said. “If there is a slight possibility of default or even the idea of default appears, it is obvious that this economy is already under stress.”

It does make sense. Especially since the mass media have already started talking about potential problems in Ukraine that has just stabilized its financial position. RIA Novosti reported that according to Alexander Dubinsky, a deputy of the Verkhovna Rada representing the Servant of the People party, the default is about to happen in Ukraine. Moreover, without global financial assistance it is impossible to pay back the whole amount of debts of the country.

In an interview with the Vlast vs Vlashchenko YouTube channel, Dubinsky stated that the Ukrainian government has no action plan to provide the necessary standard of living under the conditions of the coronavirus outbreak.

Independent analyst Dmitry Adamidov says that, unfortunately, JP Morgan did not specify which countries may default. He told, that supposedly, these are the goof old PIIGS -- Portugal, Italy, Ireland, Greece and Spain, although in terms of debt it should had been Japan and the USA. Apart from the upper tier nations, the aforesaid Ukraine and Argentina are likely to get on the list, too. Both entirely depend on the favors of the International Monetary Fund.

“Jokes aside, we are being slowly prepared for the inevitable hyperinflation,” said Adamidov. “There is the so-called false dilemma: if you do not want a default, hyperinflation is bound to happen. In theory, in a couple of months there might be more detailed and extensive talking on the issue.”

Indeed, a huge amount of problems within the global economies, a definite wear of the financial system and demand gaps might provoke a series of defaults everywhere, agrees Anna Bodrova, a senior analyst at the Alpari information and analysis center. This is a great risk which is clearly visible at the level of central banks.

At present, in order to avoid it, the Federal Reserve System of the USA and European Central Bank shovel money in the economies. The huge flow of free and cheap liquidity is expected to support corporations and businesses and stabilize the situation from within. In order to assess how efficacious it is, some time will have to pass. However, there are some early indications that ultra-soft measures within economic systems are exactly what the world needs.

A chain of defaults, predicted by J.P. Morgan – provided the scenario translates into life – will by itself confirm the fact that the recession has not just begun but has long been going on, said Artyom Deyev, head of analysis department at AMarkets. In fact, in recent years, all the tendencies indicative of another global crisis have been observed in different countries. Moreover, the number of recession indicators is increasing every day. The world economy has long been in a state where trade and production are slowing down and demand is falling. If various indices grow, they do it at a very different pace than it was before.

At present, against the backdrop of the coronavirus outbreak, there has been a step-by-step collapse of supplies, logistics chains and production processes in various industries around the world.

According to Deyev, the onset of recession is only a matter of time. The longer the coronavirus pandemic lasts, the more negative tendencies will occur in the global economy. Defaults will be just a logical end of a certain stage of the crisis, said Deyev.

And yet, the default of a country like Lebanon is unlikely to become a harbinger of the global crisis, says Alexey Antonov, analyst of Alor Broker. The global crisis or global recession might be triggered only if all the leading economies of the world come to a standstill. They are the so-called “pillars” which the business world and big businesses cling to. Countries that are insignificant in world trade are not likely to affect the global crisis because they have no status in the hierarchy of influence, Deyev told Besides Lebanon, the list includes other nations where the situation is similar -- mainly the ones in Africa or South America and Venezuela.

The precursors of a default in Lebanon appeared long before the coronavirus broke out or U.S. President Donald Trump declared a trade war on China. Alexei Antonov believes that defaults of that kind are rather the result of a long “illness” of the economy, poor quality of political governance, high level of corruption and low level of education of people. There will always be the countries with the above-mentioned problems in the world. And there will always be the world funds that will find ways to support them if the symptoms of economic “illness” stay visible.

One way or another, but default, namely, inability of some states to repay their debts, is quite likely under conditions of aggravating financial problems in the world due to the coronavirus, admits Ivan Kapustyansky, a leading analyst at Forex Optimum. The countries with weak economies and the high debt-to-GDP ratio, which are heavily dependent on foreign loans, are at risk. This opinion by Stubbs seems to be true.

Judging by his interview with the Ukrainian edition of the Dzerkalo Tyzhnia, Ukraine might also get on this list. Swords are now crossed over a new IMF loan program worth $5.5 billion. Without it, it will be difficult to repay the previous foreign loans of $17 billion in 2020. The biggest payments are scheduled for May and September when the country will have to pay off $5 billion.

At the same time, the possible default of a number of countries does not necessarily mean the global economic crisis, believes Kapustyansky. For the current year the IMF predicts so far that the global GDP will not decline but its growth rate will reduce to about 2%. Defaults in peripheral countries which do not have a strong impact on the world economy and funding chains, may remain an unpleasant but not determining factor.

However, chances are the crisis will erupt if the coronavirus continues spreading until the end of the year. Then the defaults of the abovementioned countries will not be a cause but an episode of the global cataclysm.

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