“Companies with large amounts of debt are borrowing more money at a breakneck pace, prompting the Federal Reserve to flag the trend as one potential risk in the financial system.
“Loans to companies with large amounts of outstanding debt — known as leveraged lending — grew by 20 percent in 2018 to $1.1 trillion, according to the Fed’s twice-annual Financial Stability Report. The share of new, large loans going to the comparatively risky borrowers now exceeds peak levels reached previously in 2007 and 2014.
“Defaults on these loans remain low, but the Fed warned that could change if the economy faltered.
“Risks associated with leveraged loans have “intensified, as a greater proportion are to borrowers with lower credit ratings and already high levels of debt,” according to the Fed report, released Monday. “Any weakening of economic activity could boost default rates and lead to credit-related contractions to employment and investment among these businesses.”
“…the central bank is not sounding especially confident about the fallout should an economic hiccup ripple through the leveraged lending sector.
““It is hard to know with certainty how today’s Collateralized Loan Obligations structures and investors would fare in a prolonged period of stress,” the report said.”
“Among credit funds, a crop of shady operators are employing “manufactured defaults,” wherein buyers of credit-default swaps—securities designed to profit if the issuer misses an interest payment—persuade the debtor to halt payments, triggering a default and a windfall for the fund.
“It’s almost like buying insurance on a neighbor’s house and burning it down.”
“Big banks have complained for years about a key feature of the Dodd-Frank overhaul requiring them to keep billions of dollars of cash in reserve. Some are trying to find a way around it.
“Commercial banks including Wells Fargo & Co. have been dangling higher rates over the past year to attract deposits from Fannie Mae, Freddie Mac and other government-backed lenders, according to industry executives. The goal is to replace one type of funding banks use to manage their daily finances, overnight loans, with another, deposits.”
“Major banks [such as Deutsche Bank, Royal Bank of Scotland and Citibank] enabled fraudsters to steal billions of pounds of public money through VAT scams, allege documents obtained by the Bureau [of Investigative Journalism]. A decade later, tax authorities are still chasing the money through the courts.
“Traders in London facilitated the so-called carousel fraud by organised crime gangs in 2009, which involved the trading of carbon credits, permits which allow a country or organisation to emit greenhouse gases. The gangs imported millions of carbon credits from outside the UK without paying VAT on them. They sold them on to traders adding 20% to the bill as if they had paid VAT. “
“Sweden’s krona declined to a decade low against the euro amid renewed anxiety about a global trade war and as the latest data fueled concern a slowdown in the Scandinavian economy is deepening.
“The Swedish currency extended the worst year-to-date performance among Group-of-10 currencies as investors spurned riskier assets after U.S. President Donald Trump threatened to increase tariffs on Chinese goods.”
“[German] Factory orders in February, which had deteriorated at the fastest pace since the financial crisis, were revised on Tuesday to a decline of 4 per cent. On a year-by-year basis, orders fell 6 per cent in March.”
“If the postponing of Brexit has allowed the 28 member states a degree of breathing space to focus on the European elections at the end of this month, Italy’s economic outlook has the potential to trigger a potentially far greater financial crisis waiting to happen at the very heart of the EU.”
“Australia’s central bank kept rates at record lows on Tuesday while signaling future cuts if the unemployment rate failed to nudge lower as the country’s retailers suffered their worst quarter in nearly seven years.”
“New Zealand’s central bank may cut interest rates to fresh historic lows as the economy cools and inflation falls further below target.”
“Two days before Zimbabwe celebrated 39 years since independence in April, citizens received an unwanted early birthday present: the cost of a loaf of bread doubled.
“It was yet another sign the country is sinking into an uncontrollable financial crisis that the relatively new president, Emmerson Mnangagwa, appears unable to solve.”
“The trigger for the demonstrations that brought the downfall of [Sudan’s] President Omar al-Bashir in April was the trebling of the price of bread last December.
“It came after a major devaluation of the Sudanese pound in an effort to make the official rate for the pound drop to that of the black market. With the International Monetary Fund pushing for austerity and the rate of inflation hovering around 70%, the camel’s back was finally broken.”
“In a world of cheap and abundant money, Nigeria has been among the big beneficiaries of a global hunt for yield… Increasingly, however, analysts are raising questions over the proceeds of bond sales…
““They have borrowed quite a bit, but where is the money being spent?” asks Andrew Roche, Managing Partner of Finexem, a Paris-based financial consulting firm.
“He expressed worry that the government had been using borrowed cash to patch up holes in budgets, rather than investing in infrastructure or industry, or in efforts to diversify the economy from a heavy dependence on oil.”
“The revered peso-dollar exchange rate, which in Argentina acts as an indicator of fear, showed a 10 percent slide of the national currency in seven days in April.
“The ‘riesgo país’ index, which measures the spread between Argentine sovereign bonds and US Treasury bills considered safe assets, shot past the psychologically important barrier of 1000 percentage points…”
“One in 15 borrowers [US] has considered suicide due to their school loans, according to a survey…
“Student loans are the second-biggest kind of debt in America behind home mortgages and often more expensive to service relative to the amount owed because interest rates are generally higher.”
“Prices for industrial metals are slumping, renewing investor concerns that pockets of weakness remain in the global economy.
“The declines, which began as early as mid-March for aluminum and in April for other base metals, accelerated last week after disappointing manufacturing data in the U.S. and China. The figures raised worries that Beijing’s stimulus efforts haven’t kicked in as quickly as investors had hoped and that strong U.S. growth in the first quarter could prove transitory.”