Evergrande to default on Thursday, turmoil to get worse before it gets better – Danske Bank

Evergrande needs to pay interest payments on Thursday including a coupon worth USD83.5 M. Economists at Danske Bank believe a default could trigger further contagion in Chinese markets with some spill-over to global markets. 

Chinese government to eventually intervene

“One scenario is that Evergrande ends up in bankruptcy but that the government will try to ringfence the company to avoid contagion. This might be done by ordering state banks to buy high yield bonds in the market and at bond issuances by other developers. And that state banks lend developers money enough to avoid others from defaulting. Once the government shows its’ hand in the market, other investors will probably step in and buy credit bonds again. A big gain could be made if credit bond yields decline subsequently from current high levels.”

“A worse case scenario is that Beijing does not intervene. That could lead to a severe crisis as domino effects would lead to a financial crisis. A middle scenario would be that they intervene but very late and that global financial markets and global economy will take a big hit before things turn around again.”

“Our baseline scenario is that Evergrande defaults this week and that things will get worse before it gets better. The timing of when it gets better is very difficult, as it depends on 1) how bad markets develop and 2) Beijing’s patience before stepping in.”