• Is Evergrande’s $300 billion debt crisis a systemic risk to the cryptocurrency industry?

  • As observers predict that top Chinese real estate developer and commercial paper issuer Evergrande will default, some analysts believe the company poses systemic risks to cryptocurrency.

    Analysts are wondering whether Evergrande Group, China’s second-largest property developer, will default on its $300 billion in debts, and whether the firm’s collapse could pose contagion risks for the crypto industry.

    Fitch Ratings stated on September 8 that it “appears probable” that Evergrande will default on its debts, with the company later admitting that it will be unable to sell properties or other assets in its possession quickly enough to service its rapidly mounting debts.

    Evergrande predicts a “significant continuing decline in contract sales in September,” resulting in “continuous deterioration of cash collection by the Group” and putting “tremendous pressure on the Group’s cash flow and liquidity,” according to a statement released on Tuesday. The following was added to the document:

    “In light of the difficulties, challenges, and uncertainties mentioned above in improving its liquidity, there is no guarantee that the Group will be able to meet its financial obligations.”

    Australian economist David Llewellyn-Smith recently speculated that Tether, the leading stablecoin issuer, may have exposure to commercial paper issued by the “$300bn debt monster,” warning that Bitcoin (BTC) may be one of Entergrande’s counterparties due to Tether’s (USDT) dominance as a BTC pairing. Tether, on the other hand, has denied this.

    According to Tether’s most recent attestation report, $30.8 billion of its $62.8 billion in assets are held in commercial paper, with the Financial Times estimating the company ranks among the top ten holders globally.

    Despite Tether’s claims that it holds no commercial paper issued by Evergrande, Cinneamhain Ventures partner Adam Cochran stated that an Evergrande default would have a “huge impact on the commercial paper market” in general.

    Onlookers fear that Evergrande’s demise will have far-reaching consequences for the commercial paper market, with Reuters describing the company as “the biggest issuer of commercial papers,” with $32 billion in assets as of late 2020.

    “At the moment, both Tether and Circle hold commercial paper, and while I doubt either would have large swaths of Evergrande bonds, the market as a whole will reel a little.”

    “I believe both of those will still have more than enough wiggle room to prevent any actual meltdown, but if we have a really bad meltdown, they could certainly get a bit off peg,” he added.

    Audits of USD Coin (USDC) issuer Circle in July revealed that commercial paper held 9 percent of the firm’s assets at the time.

    According to William Fong, a senior trader at Australian crypto investment firm Zerocap, Evergrande’s debt crisis will culminate in default and government intervention, implying that the wholesale economic collapse predicted by some observers is unlikely.

    “More likely, the group goes into administration and the fall is cushioned by the authorities,” he said, adding that Evergrande bondholders are unlikely to receive full repayment.

    Fong believes the potential impact on the crypto industry if Evergrande defaults is unknown, noting that some investors “may diversify away from traditional bond market allocations into less correlated asset classes.”

    Investors, on the other hand, “could shift funding into safe-haven assets such as US Treasury debt,” he added.

    Other analysts believe Evergrande is already wreaking havoc on international markets, with Tracy Alloway reporting that junk-rated debt yields have risen to their highest level since March 2020.

    China’s Ministry of Housing and Urban-Rural Development has informed banks that Evergrande will not be able to meet its repayments this week.

    According to the sources, Evergrande is still investigating whether it can obtain loan extensions or roll over some of its debts, and that Guangdong authorities have rejected the company’s founder’s bailout request.

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