The Week Ahead: Debt and Maturities Concern Investors

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What do a Chinese real estate developer and the US government have in common?

IOUs.

The real estate company needs to pay it back, and Uncle Sam needs to be able to borrow more. How they meet or miss these obligations may dominate investor attention over the coming week.

First, the Chinese real estate company Evergrande Group falls short of its grandiose name. The company has practiced the “borrow to build” strategy of large-scale real estate development. He owes $ 350 billion in total, but relatively smaller sums worry global investors, including a bond interest payment of $ 47.5 million due this week. This comes after a mortgage payment of $ 83.5 million owed last week. The company has 30 days to honor the IOUs.

Financial instability from a real estate developer that most U.S. investors had never heard of before last week helped fuel a strong one-day stock sell-off. The shareholders were able to ignore the concerns, but not the Chinese government. According to the Wall Street Journal, local governments in China have been urged to prepare for the economic and community ripple effects if Evergrande skips payments and collapses. Chinese leaders are keen to contain any collapse that could hurt house prices, hurt growing household wealth and cost the Communist country jobs. Markets are on the lookout for any potential contagion spreading overseas.

Then, in Washington, Congress ran out of time to raise the federal government’s borrowing limit. The Senate is expected to vote in the coming week on increasing the debt ceiling. This is needed to keep the government fully open later this fall, when its credit is maximized without action.

Democrats have a one-vote majority in the upper house thanks to the vice president’s decisive vote. Republicans oppose raising the debt ceiling through the Biden administration’s infrastructure spending ambitions. The majority party on Capitol Hill can probably still cringe through the increased time using parliamentary procedure, but it will come at the cost of rejecting the compromise ahead of the 2022 election cycle.

These two debt issues are distinct, but they can both hurt investor confidence as deadlines approach.


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