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Tags: China | Greenspan | crisis | credit

China's Growing Credit Crisis Threatens Global Economy

By    |   Friday, 10 January 2014 06:36 AM

George Soros became the latest expert to issue a warning about China. Soros noted that the country is struggling to get debt under control while working to expand the economy. He believes those two goals are incompatible and growth will require additional debt.

The debt crisis has led to several spikes in short-term interest rates. In December, China's central bank allowed overnight interest rates to move higher. In his new book, The Map and the Territory, former Federal Reserve Chairman Alan Greenspan points out that crises in short-term credit markets are rare and dangerous. Greenspan counts three times in history when short-term markets failed to function effectively — in 1907, 1929 and 2008.

Risks should be lowest in the short term. When risk rises to a high level in overnight credit markets, the economy loses the ability to function. This happened in 2008 when short-term financing became impossible for even the strongest companies to obtain.

One reason 2008 unfolded the way it did was because investment banks had become excessively leveraged. An inability to refinance debt led to the collapse of several firms and as risks grew, credit markets stopped functioning.

Markets are interconnected and it is doubtful that China's problems will remain isolated. As we saw in 2008, the crisis developed in a series of small events. Several events have already occurred in China and more are likely. If Greenspan is right, this could signal the start of a crisis similar to the one seen in 2008.

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MichaelCarr
George Soros became the latest expert to issue a warning about China. Soros noted that the country is struggling to get debt under control while working to expand the economy. He believes those two goals are incompatible and growth will require additional debt.
China,Greenspan,crisis,credit
247
2014-36-10
Friday, 10 January 2014 06:36 AM
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