Evergrande losses raise fears of impending credit contagion, Janet Yellen is asking for the US debt ceiling to be raised

Global investors are keeping their eyes peeled on Evergrande Group, or Evergrande Real Estate Group, China's second-largest real estate developer by sales. Evergrande Group shares fell to an 11-year low on Monday and many analysts and economists are worried about possible credit contagion. Credit problems with China's real estate industry had a major impact on global markets, as European and US stocks fell overnight in Asia.

Counterparty risk and Evergrande Group liquidity shocks could trigger credit contagion on a global scale

Many people woke up to the news of the Chinese Evergrande group lose a significant amount its market capitalization as the company's shares plunged to an 11-year low. Although Evergrande losses cannot alone collapse the economy, they could Domino effect like the collapse of Lehman Brothers during the 2007-2010 financial crisis. The domino effect is called “credit contagion,” and signs of it are already emerging.

Other mega real estate giants based in Hong Kong and China are feeling the heat of Evergrande Group's losses and the possibility of the company defaulting. Hong Kong's Henderson Land Development Co. saw a significant sell-off and Ping An Insurance Group Co. also posted losses. The Hang Seng Tech Index fell in value on Monday morning as the news rocked markets. Analysts and economists believe Evergrande's debt could move to other lenders and bond markets in the near future.

The problem with Evergrande and China's real estate bubble is that all the Keynesian "solutions", liquidity injections and bailouts have already happened.

It's not about liquidity, but about solvency.

– Daniel Lacalle (@dlacalle_IA) September 20, 2021

Basically, credit contagion occurs when counterparty risk and liquidity shocks occur in the market and creditors reduce their positions and move to safer trading venues. Zero Hedge columnist Tyler Durden explained that the market expects the Chinese Evergrande Group to default on a series of payments, which will trigger a significant domino effect on global markets.

Sinic Holdings Group (2103HK)

Contagion: Another Chinese real estate development company is down over 90% this morning. #Evergrande pic.twitter.com/g8CorYBDSE

– T O’Mahony (@TurboCBDC) September 20, 2021

“Speaking of Evergrande’s impending default,” Durden wrote on Monday. “We previously mentioned that while the company is scheduled to pay $83.5 million in interest on its March 2022 offshore bond on September 23, and then has an additional $47.5 million interest payment due on September 29, 2024, the day of reckoning may be coming.” Already on Tuesday: That's because Evergrande is supposed to pay interest on bank loans on Monday, with a one-day grace period," the author added. Durden's criticism of Evergrande's solvency continues:

In other words, if there is no extension, it could experience technical outages as early as Tuesday (for a much more detailed analysis of what's next, see This is how the contagion of Evergrande's standard will spread to the rest of the world.) Spoiler alert: A default is looming because Chinese authorities have already told major lenders not to expect repayment.

So far, Bloomberg and Durdens have Zerohedge reported on at least eight investment grade companies that have withdrawn their bond offers due to the Evergrande crisis. Additionally, Durden and many others predicted Evergrande's collapse months ago as one person tweeted: "Evergrande bonds flush update. If you're wondering why you should care, you'll soon find out" on July 20, 2021.

Janet Yellen's plea to raise the debt ceiling ahead of a possible default in October

Meanwhile, US Treasury Secretary Janet Yellen has shown that she is worried via presets. On Sunday, Yellen called on lawmakers in Congress to raise the federal debt ceiling, saying a U.S. default could be catastrophic as the impact of the Covid-19 pandemic worsens.

“We would emerge from this crisis as a permanently weaker nation,” emphasized Yellen. While predicting Evergrande's impending default, Yellen said the US could default by October. At that point, the Treasury will have exhausted all available cash reserves and will be limited by the debt ceiling, the finance minister said.

"We can borrow more cheaply than almost any other country, and a default would jeopardize this enviable fiscal position. It would also make America a more expensive place to live, as the higher cost of borrowing would fall on consumers," Yellen said. “Mortgage payments, car loans, credit card bills – anything purchased with credit would be more expensive after default.”

dear @federalreserve Can we just skip the drama and go to the part where you start buying ETFs and stocks?

Everyone knows it's coming

— Zerohedge (@zerohedge) September 20, 2021

On Monday, US stocks such as the Dow Jones, Nasdaq, NYSE and others lost sharply in value during the morning trading sessions and continued to decline throughout the day. Gold markets fell to lows not seen in six months and the crypto economy lost more than $250 billion in 24 hours time.

What do you think about global markets being roiled by Evergrande Group's default fears? What do you think of Janet Yellen's call to raise the US debt ceiling? Let us know your thoughts on this topic in the comments below.

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