Another long tweet, for hard-core debt-restructuring geeks: It’s not easy to understand the overall impact of these swaps on China’s debt burden. In some cases, especially, apparently, with SOEs and state-bank creditors, the debt is erased with a...
reut.rs/2FMrC7g
reut.rs/2FMrC7g
...transfer of equity from the indebted company, but the creditor bank may put the equity back to the company at a price that guarantees no loss. Instead of a debt/equity swap, in other words, this is really a debt/long-term-repo swap.
More important is the question of who is...
More important is the question of who is...
...absorbing the loss. The key to any debt resolution is assigning the loss. If debt/equity swaps are being done as swaps of equal market value – which everyone is pushing Beijing to encourage, ironically – then there really is no net improvement in the debt burden. The losses...
...remain within the bank, in which case because total losses already far exceed capital, lower corporate debt is matched with higher contingent liabilities in the banking system: corporate debt has effectively been transferred to the government balance sheet.
The meaningful...
The meaningful...
...way that debt/equity swaps reduce the Chinese debt burden is if local governments/SOEs enter into swaps in which the market value of equity and other assets they give up is equal to the face value of debt exchanged, which I don’t think is happening. Only in that case is the...
...loss truly assigned, and it is assigned to local governments and SOEs who have sufficient assets to absorb the loss.
Market-based swaps may be great for distressed debt buyers, but while they realize the losses for banks, they don’t resolve them.
Market-based swaps may be great for distressed debt buyers, but while they realize the losses for banks, they don’t resolve them.
