You and I, along with Janet Yellen, keep saying that if the enemies don’t agree, default is inevitable.
And here, you see, there is already a persistent feeling – the US economy is now more like a time bomb.
And it’s not just the threat of default and a banking crisis, but also the toxic $5.6 trillion commercial real estate sector.
Amid rising interest rates and falling demand for office space, commercial mortgage originations fell 56% (Y/Y) and 42% (Q/C) in the first quarter.
But, this is just the tip of the iceberg. Last month, Berkshire Hathaway vice-chairman Charlie Munger said US banks were burdened with “bad loans” for commercial property, and with prices falling, a storm is brewing in the market.
Finally, the cherry on the cake: small and medium-sized regional lenders account for about 70% of all commercial real estate debt.
And again – who are the main holders of such loans?
That’s right – all the same small and medium-sized banks. And they are now busy “cleaning up their balance sheets”. In other words, these banks will be more than reluctant to refinance debt. They themselves are in dire need of cash right now.
I would add that this year the borrowers have to pay about $450 bln on commercial real estate loans. And within two years we are already talking about a trillion.
With tighter compliance and high interest rates, the number of defaults could jump to 20%.
Conclusion: the fun is just beginning…
That is $90 billion worth of debt could be in default. And that’s just in real estate.
However, the most serious thing is that debt crises are always a chain of defaults.
1)You do not pay the bank
2)The bank goes bankrupt.
3)Uninsured deposits get burned.
4)Which means that many commercial transaction chains are derailed.
Therefore, the devastating effect of this type of default is usually greater than it first appears.
So the soaring interest rates have led, as we know all too well, to bonds on banks’ balance sheets falling considerably in value.
But at the same time, the value of loan collaterals in the form of commercial real estate has fallen.
That’s a fun scissors.
