Moneycontrol Pro Panorama | When debt becomes dare

The bills always come due in the debt market. It has now become a dare to everyone from firms to individuals whether they can repay their dues and then some.

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The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of. 

A week ago, we wrote about making bonds great again. Well, it seems like even the US Federal Reserve thinks this is doable. Fed Chairman Jerome Powell is finally letting go of policy rate hikes if his comments post policy were anything to go by. While not everyone is buying into the argument for no more hikes, bond vigilantes seem to be celebrating a small victory as treasuries have cooled off. Powell has noted that the spike in the bond market is doing the job of the Fed in tightening financial conditions and that the Fed could take a break. Long story short, bond vigilantes have done their job.

Now what?

Powell also seems to note that elevated policy rates are finally breaking things in the economy. Granted, the US economy is still growing great guns (it grew 4.9 percent in the third quarter) and labour markets are far from being loose. But there is growing caution among consumers. Citigroup chief executive Jane Fraser in a post earnings call said that deceleration in spending has continued, which indicates a cautious consumer.

JPMorgan reported bumper profits, but Jamie Dimon sounded ominous in his comments just hours after Powell’s pause. Dimon said the elevated interest rates would hurt companies that are not prepared for higher-for-longer. Add geopolitics to the mix and Dimon could be justified in saying, “This may be the most dangerous time the world has seen in decades.”

There is growing disquiet among companies and even governments due to elevated interest rates. Our Chart of the Day highlights how elevated interest rates are breaking the balance sheets of frontier and emerging market sovereigns. The insight is from global rating agency Moody’s Investors Service which has in a report warned that global default rates could go through the roof owing to elevated interest rates. “While our baseline scenario does not anticipate a sharp increase in corporate default rates over the next 12 months, a number of economic and financial risks may crystallise and send the default rate higher,” the report says. A month ago Standard & Poor’s had warned that corporate defaults have jumped with August showing the highest monthly cases since 2009, according to this Reuters piece.

Financial conditions are tight, but are tighter in emerging market economies who are most vulnerable to high interest rates. Defaults will find their way into bank balance sheets as bad assets and the bumper profits that lenders are throwing up now would soon give way to rising delinquencies that would eat up profits.

The bond market is great again because it can take away all the gains and more if you are not disciplined. Frontier economies and some emerging market sovereigns are finding this truth now. Several sub-Saharan governments will need to soon choose between social spending and reining in debt.

The biggest fiscal borrower in size, the US, has also come under the scanner. A default by US could still be some way from now, (20 years according to Penn Wharton School researchers), but the International Monetary Fund (IMF) considers the US debt dynamics “very unfavourable”.

What could happen to US banks tomorrow is happening for UK lenders today. We know Standard Chartered Bank’s profits took a hit due to exposure to China through commercial real estate debt. Meanwhile, pandemic-era emergency loans are up for repayment for lenders to the Bank of England. UK lenders are jacking up deposit rates to replace these emergency loans and that is expected to hit margins and profits.

The bills always come due in the debt market. It has now become a dare to everyone from firms to individuals whether they can repay their dues and then some.

Unfortunately, debt is a dare that no one can say no to.

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Technical Picks: Gold bees, State Bank of India, ACC, Apollo Tyre and Lead (These are published every trading day before markets open and can be read on the app). 

Aparna IyerMoneycontrol Pro