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Real estate and companies: fear of financial crisis 2.0 is growing

Ten years after the financial crisis peaked in March 2009, fears of a new financial crisis are over. The hot real estate markets are worrying. But the biggest danger this time comes from the companies.

Notker Blechner,

In the US, fear is over – before a new real estate crisis. After the prices in the past years knew almost one direction, namely upwards, they now go back to cities like New York. The price of a Manhattan apartment has dropped by an average of five percent on an annualized basis.

Real estate crisis as a harbinger of recession

Since 2012, house prices in the US have increased by around 50 percent. In Phoenix, Denver and Atlanta, prices have almost doubled.

That's a bad omen. Because since the end of the Second World War, nine out of eleven recessions in the US have been triggered by a collapse in the real estate market. In 2008, even the massive defaults on subprime lending in the US housing market led to the great economic and financial crisis. Could this be repeated? Probably not, say most experts. They rather expect a "soft" landing of the US real estate market.

Loans for indebted companies in high demand

The biggest threat could come from companies this time. More specifically, companies that are heavily in debt and still be provided with credit. The market for so-called "leveraged loans", ie loans from heavily indebted companies is booming. The market for securitized loans already has a volume of $ 1.3 trillion. This makes it larger than the market for high-risk junk bonds. And twice as large as the 2007 mortgage subprime market, Bank of England chief executive Mark Carney recently warned.

The leveraged loans have no fixed interest coupons but a risk premium on interbank rates such as the Libor. For debtors with bad credit, it has become cheaper to continue to borrow. Conversely, the risks to creditors increase. The share of "covenant-lite" loans, loans without solvency checks, has climbed to its highest level since the financial crisis.

Fed and Bank of England worried

The central bankers are alerted. The Fed is worried about the gigantic volume of leveraged loans, the loans for companies with poor credit ratings. The Bank of England recently drew parallels with US subprime loans, whose massive defaults triggered the 2008-09 financial crisis. The portfolio of leveraged loans is now twice as large as that of the subprime 2007, said the Bank of England chief Mark Carney. In addition, the market is growing faster than the subprime market.

Former Fed President Janet Yellen recently warned of a new looming financial crisis. The high debt burden of American companies worried her, she said shortly before Christmas 2018 at a discussion in New York with star economist and Nobel prize winner Paul Krugman. Meanwhile, the debt is over nine trillion dollars. Before the financial crisis, it had been just under five trillion dollars.

Corporate debt in the US at record levels

Even financial market experts such as Feri-Chefanlagestratege Heinz-Werner Rapp currently see one of the biggest risks, the corporate debt. He has found that the debt of US companies has now climbed to over 45 percent of GDP – more than ever.

Fund manager Bert Flossbach also sees the leveraged loans as a potential threat to the financial markets. The financial crisis has shown that investors usually misjudge the risks of these "packaged" products, he said. Hardly anyone knows where these loans are and who holds them.

Who saves the zombies?

Not only in the US, but also in Europe, leveraged loans are granted quite loosely. More and more companies are moving around as zombie companies, whose business is maintained only by zero interest rates. As soon as the interest rates go up or the first creditors are worried about the repayment of their loans, a chain reaction could happen: The zombie companies would not receive any more money and go bankrupt. As a result, more creditors would withdraw their capital, which should cause new bankruptcies. A crash in the corporate credit market would have dire consequences for the financial markets and the global economy.




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