Is the Evergrande crisis the same as the Lehman Brothers? Can it affect the USA?
The plight of the Chinese company Evergrande is drawing comparisons to the collapse of Lehman Brothers, a defining moment of the financial crash of 2008.
Evergrande is a Chinese real estate developer, one of the largest in the world. On Thursday, the company is due to pay $83.5 million in interest payments, and another $47.5 million on September 29. If these aren't paid in 30 days, then the company would default on its bonds, a worrying time for investors.
The stock of the company is plummeting and regardless of the outcome, investors will be massively short-changed. There is an expectation the Chinese government will step in to protect one of its biggest businesses from collapsing or simply dismantle the business, but the fallout is already threatening entities from football clubs to the global economy.
China's central bank injects 120 billion yuan ($18.6 billion) into the banking system after concern over a debt crisis at Evergrande roiled global markets https://t.co/U75QYOkie6— Bloomberg Economics (@economics) September 22, 2021
Another huge company to default on debt was the Lehman Brothers bank. It was not bailed out and was the biggest bankruptcy filing in US history, with a staggering $600 billion in assets. Evergrande has $300 billion in debt, meaning a collapse could pose big problems for economies like the collapse of Lehman heralded.
What was Lehman Brothers?
Lehman Brothers was a Wall Street firm that moved into mortgage lending. By 2008, it had assets of over $680 billion, but only $22.5 billion of this was firm capital. A quick loss on the stock market would mean that the company would lose all of its firm assets, and be unable to pay off any of its other debts.
ICYMI: China Evergrande Group, which has about $305 billion in liabilities, said it has engaged advisers to examine its options. The property group warned of default risks and sinking property sales https://t.co/wMgWxmb4HN pic.twitter.com/BEyGlrhExs— Reuters (@Reuters) September 20, 2021
A mortgage crisis in 2007 led to a wiping out of 73% of Lehman's stock value by the middle of 2008 and the Dow Jones began to take big losses as one of its biggest companies began to falter. On the day of its bankruptcy filing, the Dow Jones closed 4.4% down, one of its biggest falls, before a bigger plunge of nearly 7% two weeks later.
What was significant about Lehman was how many countries had invested in it. Its collapse led to a drop in value of the worldwide economy. Due to the complex web of the global economy, another big collapse like Evergrande might have could be seriously bad news.
Will the US be affected?
US markets are already feeling the impact of the threat of Evergrande's collapse. The S&P 500 was off as much as 2.9% at one point in the trading session, and the Dow Jones Industrial Average lost more than 600 points by the closing bell on Monday.
But this is common for all big businesses that run into trouble. A full collapse is unlikely, and the company is likely to be picked apart rather than Lehmen-style. It will take more time for its impact on global growth to be ascertained.
"Despite the worry, so far this looks like a corporate bankruptcy and not something worse," said Brad McMillan, chief investment officer for Commonwealth Financial Network in a recent note. "It’s a big one, to be sure, but one that can be handled within the system."
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