Explained: What went wrong at Evergrande? Can it be China's Lehman Brothers moment?

Image Source: Reuters

New Delhi: China-based Evergrande Group has recently come under the scrutiny of regulators due to the massive debts piling up at the real estate firm. Concerns over a possibility of a massive default had sent shock signals across stock markets globally, as investors keep a keen watch on the developments related to the Chinese firm. 

While Evergrande Group was likely to default on upcoming, the real estate firm has now surprised everyone by promising to pay coupon payment to bondholders, according to a report by Reuters. The shares of the company jumped up to 20% on the news on the Frankfurt Stock Exchange. 

However, a quick recovery appears very difficult right now. Previously, shares of the company dipped 10% on Monday, followed by another 7% drop on Tuesday. Overall, the shares of the group have decreased over 80% this year itself, with many rating agencies downgrading the group.

All is not well

In total, Evergrande has a total liabilities of about $300 billion, equivalent to 2% of China’s GDP. The company has to settle its two upcoming interest payments -- one worth about $84 million and another one $47 million -- within 30 days of the scheduled payments. 

The company's finances are indeed in dire strain. The group has to successfully negotiate the restructuring plants with the banks in order to prevent the default looming at its door. 

What went wrong at Evergrande?

Evergrande was one of the top-selling real estate companies in China. A few years ago it was also part of a list of fortune 500 companies. However, the tightening of lending rules by the Chinese government can be seen as a major reason behind the collapse. 

The default was years in the making as the company aggressively borrowed for many years, leading to high levels of accumulated debt. Beijing’s crackdown on lending property developers as wide-scale efforts to crack down on bad loans added up to the crisis. 

Moreover, a slew of investigations launched by the Chinese government into financial institutions and shadow lenders who are willing to refinance short term debt of real estate companies made it more difficult for the real estate firm. 

The company is sitting on top of 800 unfinished projects. With lakhs of home buyers demanding action against the company and a slew of unpaid suppliers, the company's future is looking very bleak.

China's Lehman brothers moment? 

On 15 September 2008, US-based Lehman Brothers announced bankruptcy, pushing the global economy into a recession period. Many analysts believe that Evergrande’s default could lead to a global financial crisis. 

The default could have a serious threat to China's property market and economic institutions. Since both these sectors also have a great global presence the fear of the spillover effect can't be ruled out.

China's response and learning from the IL&FS crisis

The Chinese government till now has remained mostly quiet on the issue. Analysts believe that the Chinese authorities will not let this situation spill over and become a global crisis. 

There is also speculation in the financial world that Beijing may take steps to prevent a full-blown financial crisis. Some of the steps could include a financial booster to prevent a collapse. 

The Chinese government could take a cue from the Indian Government's handling of the Infrastructure Leasing & Financial Service Limited (IL&FS) crisis in 2018. Uday Kotak, the CEO of Kotak Mahindra Bank, tweeted " The Indian government acted swiftly. Provided calm to financial markets. The Government appointed board estimates 61% recovery at IL&FS. Evergrande bonds in China trading ~ 25 cents to a $.” 

For those uninitiated, Uday Kotak is also the head of a team of experts that are helping to rescue IL&FS and prepaid creditors.

Indian stock market’s reaction to Evergrande crisis 

Indian stock indices currently appear to be immune to the Evergrande crisis. On Tuesday, the Sensex reclaimed the 59,000 level as investors in India are Shrugging the Evergrande saga unfolding in China. Also Read: Zee Entertainment stock jumps 30% after merger announcement with Sony Pictures

However, a clearer picture of the case will only appear in the coming weeks. Till then, there is uncertainty looming on the financial markets across the globe. Also Read: World is witnessing initial signs of recovery from pandemic’s impact: RBI Governor Das

- With inputs from Khushi Sharma