A sharp decline in interest rates in benign economic conditions opens up the possibility of a re-acceleration in economic activity that would limit the number of future Fed cuts. One mechanism through which higher interest rates slow the economy is through reduced lending, where higher rates discourage borrowers and prompt lenders to retrench on credit concerns. Despite an aggressive rise in rates, a wide range of measures on credit quality show only modest deterioration to levels prevailing before 2020. At the same time, households and corporates remain financially sound. This suggests that a decline in rates could potentially lead to a re-acceleration of credit growth that rekindles inflationary pressures. The recent normalization of credit quality shows that borrowers have capacity to lever up, and suggests that a re-acceleration in lending would limit the number of rate cuts.
- Date Posted:
- December 8, 2023
Barclays argues, "Stripping out Evergrande, we estimate that an average 30% haircut of the total interest-bearing debts for the other 26 POE developers may be required to: 1) improve EBITDA coverage ratios to more than 1.5x; and 2) lower debt/EBITDA ratios to 8x or below, assuming 6% average interest costs, 15% EBITDA margin, and normalised contracted sales at the 2022 level. Moreover, if only offshore creditors have to bear the cost of the restructuring (ie, no haircuts on onshore debts), then we estimate the potential debt haircuts would need to increase to around 70% for offshore debts, assuming offshore debt accounts for 50% of interest-bearing debts."