One often overlooked development on the international markets is the brewing potential for a rash of corporate defaults. Global debt is at an alarmingly high level. At the same time, banks around the world find themselves in an increasingly precarious financial position. One factor that looms large in the struggles of banks has been the rising number of non-performing loans.
Banks across the international spectrum are beset with high numbers of non-performing loans (sometimes abbreviated NPL). This simply refers to loans that are in default or nearing default. The debtors of NPLs typically haven’t made their loan repayments in over 90 days, depending on the terms of the original agreement.
There are a variety of areas where NPLs are becoming an issue. The People’s Bank of China (PBOC), for example, says that it expects its non-performing loans to quadruple over the next two years. This is mainly because of widespread lending to construction companies that have since gone defunct.
In the U.S., there has been an explosion in subprime car loans that are starting to lead to defaults. While this conjures memories of the subprime mortgage crisis that fueled the financial collapse of 2008, the mainstream media predictably tells us not to worry. Perhaps some solace can be taken in the fact that auto loans involve a fraction of the money of a home mortgage; moreover, foreclosure often takes years and leaves the asset in disrepair, whereas cars can be repossessed within hours and resold to mitigate the bad loan.
Meanwhile, Europe’s banking system is overflowing with bad debt amid slumping growth—a lethal combination. While the eurozone as a whole has suffered, Italy has been at the center of this recipe for disaster. Italian banks are holding the most NPLs in Europe, totaling €360 billion ($409 billion). In fact, Italian banks are underperforming their peers around the continent as well as faring worse than the broader markets in Italy.
House of Cards
These fault lines in the world economy are more evidence that the current system is built on a shaky foundation. For instance, the amount of money in derivatives (fictional assets, really) has erupted far beyond the amount of real wealth in the world. Derivatives account for more than $1.2 quadrillion ($1,200,000,000,000)! You can check out a graphical representation of this imbalance at MarketWatch. This is exactly the kind of over-leverage that got the global financial system into a mess to begin with.
The impact of the global economic dysfunction is being felt worldwide. Government bonds are seeing alarming amounts of safe-haven demand. In the U.K., 10-year Gilts are selling for a record-low yield of 1.51%, seeing their strongest demand in two years. The 10-year U.S. Treasury is similarly at crisis-level yields of 1.71%. Meanwhile, export revenue for Japanese companies are getting slammed by a strong yen, which has appreciated to 108¥ per dollar. The yen has gained more than 10% against the greenback year-to-date.
As companies continue to default while bonds and overseas assets become less attractive, the truest safe haven that investors can rely upon is gold and precious metals, which provide a tangible hedge against economic downturns.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.