2/4/2016 ToxicLoansAroundtheWorldWeighonGlobalGrowthTheNewYorkTimes

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ToxicLoansAroundtheWorldWeighonGlobalGrowthByPETEREAVIS FEB.3,2016

Beneaththesurfaceoftheglobalfinancialsystemlurksamultitrilliondollarproblemthatcouldsapthestrengthoflargeeconomiesforyearstocome.

Theproblemisthegiant,stagnantpoolofloansthatcompaniesandpeoplearoundtheworldarestrugglingtopayback.Baddebtshavebeenadragoneconomicactivityeversincethefinancialcrisisof2008,butinrecentmonths,thethreatposedbyanoverhangofbadloansappearstoberising.Chinaisthebiggestsourceofworry.SomeanalystsestimatethatChinastroubledcreditcouldexceed$5trillion,astaggeringnumberthatisequivalenttohalfthesizeofthecountrysannualeconomicoutput.

OfficialfiguresshowthatChinesebankspulledbackontheirlendinginDecember.Ifsuchtrendspersist,Chinaseconomy,thesecondlargestintheworldbehindtheUnitedStates,maythenslowevenmorethanithas,furtherharmingthemanycountriesthathaveforyearsreliedonChinafortheirgrowth.

2/4/2016 ToxicLoansAroundtheWorldWeighonGlobalGrowthTheNewYorkTimes

http://www.nytimes.com/2016/02/04/business/dealbook/toxicloansinchinaweighonglobalgrowth.html?_r=0 2/5

ButitsnotjustChina.Wherevergovernmentsandcentralbanksunleashedaggressivestimuluspoliciesinrecentyears,atoxicdebthangoverhasfollowed.IntheUnitedStates,ittookmanymonthsformortgagedefaultstofallafterthemostrecenthousingbustandenergycompaniesarestrugglingtopayoffthecheapmoneythattheyborrowedtopileintotheshaleboom.

InEurope,analystssaybadloanstotalmorethan$1trillion.ManylargeEuropeanbanksarestillburdenedwithdefaultedloans,complicatingpolicymakerseffortstorevivetheContinentseconomy.Italy,forinstance,announcedaplanlastweektocleanoutbadloansfromitsploddingbankingindustry.

Elsewhere,badloansareontheriseatBrazilsbiggestbanks,asthecountrygrappleswiththeeffectsofanenormouscreditbinge.

Ifyouhaveaboomandthenabust,youcreateeconomiclosses,saidAlbertoGallo,headofglobalmacrocreditresearchattheRoyalBankofScotlandinLondon.Youcanhopethelossesonedayturnintoprofits,butiftheydont,theyareadragontheeconomy.

Ingoodtimes,companiesandpeopletakeonnewloans,oftenatlowinterestrates,tobuygoodsandservices.Wheneconomiesslow,thesedebtsbecomedifficulttopayformanyborrowers.Andthebiggertheboom,themoresoureddebtthatisleftbehindforbankersandpolicymakerstodealwith.

Intheory,itmakessenseforbankstoswiftlyrecognizethelossesembeddedinbadloansandthenmakeupforthoselossesbyraisingfreshcapital.Thecleanedupbanksaremorelikelytostartlendingagainandthusplaytheirpartinfuelingtherecovery.

Butinreality,thisapproachcanbedifficulttocarryout.Recognizinglossesonbadloanscanmeanpushingcorporateborrowersintobankruptcy

2/4/2016 ToxicLoansAroundtheWorldWeighonGlobalGrowthTheNewYorkTimes

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andhouseholdsintoforeclosure.Suchdisruptioncansendachillthroughtheeconomy,requireunpopulartaxpayerbailoutsandhavepainfulsocialconsequences.Andinsomecases,thebanksmightfinditextremelydifficulttoraisefreshcapitalinthemarkets.

Evenso,thedrawbackofdelayingthecleanupisthatthebanksremainwoundedandreluctanttolend,dampinganyrecoverythattakesplace.Japan,economistssay,waitedfartoolongafteritscreditboomofthe1980stoforceitsbankstorecognizehugelossesandtheeconomysufferedforyearsafterasaresult.

NowmanybankingexpertsarebeginningtoworryaboutChinasbadloans.

FearsthatthecountryseconomyisslowinghaveweighedheavilyonglobalmarketsinrecentmonthsbecauseaweakChinacandragdowngrowthglobally.

ManyoftheseconcernsfocusonChinasbankingindustry.Inrecentyears,banksandotherfinancialcompaniesinChinaissuedatidalwaveofnewloansandothercreditproducts,manyofwhichwillnotbepaidbackinfull.

Chinasfinancialsectorwillhaveloansandotherfinancialassetsof$30trillionattheendofthisyear,upfrom$9trillionsevenyearsago,saidCharleneChu,ananalystinHongKongforAutonomousResearch.

Theworldhasneverseencreditgrowthofthismagnitudeoverasuchshorttime,shesaidinanemail.Webelieveithasdirectlyorindirectlyimpactednearlyeveryassetpriceintheworld,whichiswhythemarketissojitteryabouttheideathatcreditproblemsinChinacouldunravel.

HeadlinefiguresforbadloansinChinamostlikelydonotcapturethesizeoftheproblem,analystssay.Inheranalysis,Ms.Chuestimatesthatattheendof2016,asmuchas22percentoftheChinesefinancialsystemsloansand

2/4/2016 ToxicLoansAroundtheWorldWeighonGlobalGrowthTheNewYorkTimes

http://www.nytimes.com/2016/02/04/business/dealbook/toxicloansinchinaweighonglobalgrowth.html?_r=0 4/5

assetswillbenonperforming,abankingindustrytermusedtodescribewhenaborrowerhasfallenbehindonpaymentsorisstressedinwaysthatmakefullrepaymentunlikely.Indollarterms,thatworksoutto$6.6trillionoftroubledloansandassets.

Thisestimatereallyisntthatunreasonable,Ms.Chusaidintheemail.Weveseensimilarratiosinothercountries.Whatsdifferentisthescale,whichreflectsthemassivesizeofChinascreditboom.Sheestimatesthatthebadloanscouldleadto$4.4trillionofactuallosses.

Althoughthereisnotenoughofficialdatatocomeupwithaprecisefigureforbadloans,otheranalystshavecomeupwithestimatesofaround$5trillion.

GiventhemurkinessoftheChinesefinancialindustry,otheranalystsarriveatestimatesforabaselinefigureforbadloans.ChristopherBalding,anassociateprofessorattheHSBCSchoolofBusinessatPekingUniversity,saidthatananalysisofcorporationsinterestpaymentstoChinesebankssuggestedthat8percentofloanstocompaniesmightbetroubled.ButMr.BaldingsaiditwaspossiblethatthebadloannumberforChinasoverallfinancialsystemcouldbehigher.

Theloomingquestionfortheglobaleconomy,however,ishowChinamightdealwithavastpoolofbaddebts.

Afterapreviouscreditboominthe1990s,theChinesegovernmentprovidedfinancialsupporttohelpcleanupthecountrysbanks.Butthecostofsimilarinterventionstodaycouldbedauntinglyhighgiventhesizeofthelatestcreditboom.Andmoreimmediately,risingbaddebtscouldcrimplendingtostrongcompanies,underminingeconomicgrowthintheprocess.

MysenseisthattheChinesepolicymakersseemlikeadeerintheheadlights,Mr.Baldingsaid.Theyreallydontknowwhattodo.

InEurope,forinstance,somecountrieshavetakenyearstocometogrips

2/4/2016 ToxicLoansAroundtheWorldWeighonGlobalGrowthTheNewYorkTimes

http://www.nytimes.com/2016/02/04/business/dealbook/toxicloansinchinaweighonglobalgrowth.html?_r=0 5/5

withtheirbanksbadloans.

Insomecases,thedelayarosefromareluctance,atleastinpart,toforcepeopleoutoftheirhomes.EventhoughIrelandsbiggestbankssufferedhugelossesafterthefinancialcrisis,theyheldbackfromforcingmanyborrowerswhohaddefaultedoutoftheirhomes.Inrecentyears,theIrishgovernmenthaspursuedawidespreadplanthataimstoreducethedebtloadoffinanciallystressedhomeowners.SuchforbearanceappearsnottohaveweakenedtheIrisheconomy,whichhasrecoveredatafasterratethanthoseofotherEuropeancountries.

Still,theperilsofwaitingtoolongareevidentinItaly,whichinJanuaryannouncedaproposaltohelpbanksselltheirbadloans.Somecriticsoftheplansayitresemblesagovernmentbailoutofthebanks,whileotherskepticssaythebanksmightnotuseitbecauseitappearstobetooexpensive.

ThebigproblemintheItaliansystemisthattheyactedverylate,saidSilviaMerler,anaffiliatefellowatBruegel,aEuropeanresearchfirmthatfocusesoneconomicissues.Theycouldhavedonesomethingsmarterandtheycouldhavedoneitearlier.

AversionofthisarticleappearsinprintonFebruary4,2016,onpageA1oftheNewYorkeditionwiththeheadline:WorthTrillions,BadLoansHauntGlobalEconomy.

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