The IMF is worried about the risk of defaults in emerging markets as well it should do. One of the legacies of COVID is that emerging market’s debt has risen to 67% of GDP, low by Western standards but still an increase of a not insignificant 15% increase since pre COVID. The IMF cites the risk of a sharp tightening of Global Credit conditions undermining investor confidence. From what I can see this is already in play with countries such as Sri Lanka already suffering. The non payment insurance market is already tight and the global banking markets have enough to worry about in their own host countries following a marked increase in borrowing from both corporate and retail borrowers. At some point western economies are going to have to admit they have a collective problem that is going to be very difficult to solve. Inflation is flushing out those who have been swimming naked while the tide goes out. Central banks have got us into this mess but their most potent tool, raising interest rates, may cause more problems that it solves.
Like it or not inflation affects all of us and the Spectator reminds us that it might be with us for a long time. The UN’s Food and Agricultural Organisations food price index rose 13% last month. Not good news for emerging markets or anyone else come to that. The current war in Ukraine is not going to help and when will we all come to our senses over the cost of energy? In any case the consensus is that the central banks who pulled too many inflationary strings, QE, zero interest rates etc., don’t really have the answers to the myriad questions now being tabled. Buying monetary assets to finance current expenditures doesn’t make a lot of sense to anyone when inflation eats away at those assets. In the same page Martin Vander Weyer points out the flawed thinking involved in crypto currencies. Always worth a read.
Nothing unusual about that. Cost of living, taxes rising, mortgage payments getting missed. This story in The Daily Telegraph caught my eye for another reason. Banks are reacting to the missed payments by adjusting their credit criteria with applications from those borrowers with the largest deposits i.e over 25% being reigned in more than those with smaller equity say 10%. The reason apparently is that the risk margins for smaller deposits are significantly higher than those with a large cushion. Seems to be a bit of a short sighted approach which prioritises interest margins ahead of security. I suppose this is another result of the productization of lending but I can’t help thinking that collecting the value of the property in full once a default has occurred and foreclosure triggered is a much better prospect than taking a loss. After all foreclosures usually happen after a lengthy period of non payment when little priority is given to maintaining the property and this is compounded because banks are notoriously lazy in obtaining the best price for foreclosed properties. Seems pretty poorly thought out.
Howard Tolman is a well-known banker, technologist and entrepreneur in London,We have a self imposed constraint of 3 news stories per week because we serve busy senior Fintech leaders who just want succinct and important information. For context on Alt Lending please read the Interview with Howard Tolman about the future of Alt Lending and read articles tagged Alt Lending in our archives.
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