Two things are keeping the markets jittery this week: the interest payments on the mountain of debt owed by China’s property giant Evergrande due today and the upcoming vote at the US Senate suspending debt limits that might force a government shutdown on Sept. 30.
Until the past few weeks, not many people outside China knew the company Evergrande – the largest real estate company anywhere. The company rode the crest of China’s building boom the past few years. In the process, it accumulated a debt pile of more than US$300 billion.
With the property market softening due to the effects of the pandemic, the company now faces a serious liquidity problem. As a result, its stock dropped dramatically the past few days and it has become more difficult for the company to find banks willing to take the risk of refinancing its debt.
Evergrande is considered too big to fail. But it may also be too big to save.
Beijing does not seem to know quite what to do about Evergrande. But it hopefully understands that if this company fails, it could blow a large hole capable of sinking China’s economy. Already, financing problems facing Evergrande are being felt in neighboring economies such as Japan, whose companies supply toilet and kitchen equipment to the Chinese company’s property projects.
If Evergrande has a pile of debts to service, it also has a mountain of assets it could use to calm its creditors. The banks that lent to this property giant may have no choice but to accept assets as payment and allow the company to restructure.
On the other side of the world, the US Senate will soon cast a vital vote on the stopgap bill that passed the House of Representatives. The bill would extend funding to keep the US government running through Dec. 3 by suspending debt limits that have already been breached.
The consensus is that if the Republicans vote to keep the debt limits and force a government shutdown, the consequences could be dire. The US economy will almost certainly slip into a recession and there will be pain everywhere.
The US is the most indebted country in the world, much of its paper held by China. The US Congress tried to limit this addiction to borrowing by imposing a debt limit. But each time it is breached, the debt ceiling is adjusted to allow more debt. Political convenience trumped fiscal discipline each time.
Either a default by Evergrande or an adverse vote by the US Senate could precipitate yet another global financial crisis. No one wants this, but often the weakest links break in the most unexpected places.
I sat in a bank board in 2008 and we were closely observing the sharp rise of US credit card debt, believing this could be the breaking point that will tear down the global financial system. It turned out the weaker link was the massive exposure of financial houses to subprime property mortgages that caused the collapse of Lehman Brothers, setting off a worldwide financial meltdown.
Reclamation
A few months ago, Cebuanos were surprised by the announcement that a massive reclamation project would be undertaken off the shores of Consolacion, Cebu. The project involves a 235.8-hectare property development jointly undertaken by the local government of Consolacion and a relatively new company called La Consolacion Seafront Development Corporation (LCSDC).
Almost immediately, local fishermen and environmental groups opposed the project. Dumping gravel and sand into the sea off the Consolacion coast will kill off coral reefs, diminish the area’s biodiversity and destroy the livelihood of local fishers.
In addition, the large reclamation project will greatly reduce the anchorage areas and passageways for the busy ports of Cebu and Lapulapu. This will worsen congestion in the areas and probably force shipbuilders in the area to relocate elsewhere, resulting in massive loss of jobs.
Besides, the LCSDC has no record of completed reclamation projects. No one knows if this company has the engineering knowhow to create a reclamation project that will stand the test of time.
Whatever our predisposition might be regarding this humongous project, there should be agreement that all aspects of this proposal must be studied thoroughly. This includes not just the financial competence of its proponents but, more important, the project’s impact on the environment and on the maritime traffic it could obstruct.
The Duterte administration has not taken any serious interest in this ambitious reclamation project. It does not figure in any priorities list endorsed by the Palace. As a result, the permitting and approvals process for this project ground to a standstill. A clear timeline for the project is necessary to get any financing support.
Recently, however, the Bureau of Fisheries and Aquatic Resources (BFAR), out of the blue and without undertaking any scientific study, indicated it has no objections to the Consolacion reclamation project. This came as a surprise to those objecting to the project.
Consolation Mayor Joannes Alegado claimed the project would not destroy jobs since there are no fishermen in the area. In a recent online forum “Reclamations: Benefits and Downsides of Building into the Sea,” an expert who studied the economic and environmental consequences of the project contradicted the mayor’s claims.
Not only are municipal fishermen in the area, the expert pointed out that there are 71 species of coral endemic to the area. These are breeding grounds for the fish the local community is dependent on.
It is BFAR’s responsibility to take a closer look at all the marine and economic issues here.