You never quite know when the bad debt is going to start poking its ugly head out from within the python that is the banking system but we've been waving the red flag for a few years about the steps China took to avoid a slowdown in 2009 [Feb 16 2009: Is China Pulling an Alan Greenspan?] [May 27, 2009: How is China Spending their Stimulus... and How Many Loans Will go Bad?] and more recently [Jun 2, 2011: China Now Beginning to Feel Hangover from Lending Boom - Government May Assume Some Local Debt]. When you blow out money in every direction, much will be misallocated. . [Mar 29, 2011: [Video] An in depth Look at China's Empty Cities] [Jan 14, 2011: [Video] Behold China's Nearly Empty Mega Mall] [Nov 13, 2009: Ordos - China's Empty City]
It wasn't just China - more recently we've seen some bad behavior amongst the Brazilian consumer, many of which had access to credit for the first time. They began acting like Americans circa 2004. [Jan 12, 2011: Canada and Brazil Taking on U.S. Characteristics in Debt Exposure]
Brazil's economy grew at a 8.4% clip in the first nine months of 2010—its fastest pace in more than 15 years—powered in part by a sharp increase in government-subsidized loans and a rapid expansion in consumer credit. That can be a lethal cocktail.
The data in Brazil are troubling: Late payments on credit cards and other consumer loans jumped 23% in November from a year earlier. The country has witnessed a fivefold expansion in consumer credit over the past eight years
Apartment prices are popular dinner table -- and beach -- conversation in Rio, anecdotes of humble doormen and taxi drivers becoming real estate brokers are common, as are stories of people snapping up apartments without seeing them.3,300 new brokers were registered in Rio state last year, a nearly ten-fold increase from 2005.
The explosion of credit in recent years has raised concern that Brazil is nurturing a new breed of sub-prime consumers who are not financially astute enough to manage their debts and who could default as the economy cools and interest rates rise.
Canada and Australia also seem to be in some form of credit bubbles - especially housing related - but strong natural resource backstopped economies seem to have shielded them (thus far) from any pain. Again, knowing when exactly these 'good times' turn bad is very difficult to time - even if you see the train coming.
Whatever the case, it seems much of the BRIC is reaching a hangover level as the financial companies in these countries suffer. The stock markets have been acting poor for all of 2011, and if one believes in 'efficient markets' (I find the theory doubtful in many ways), one should be asking what the stock markets are forecasting about the economies. It's all coming together for a very fun 2012....
Bloomberg has a very detailed piece on the situation in Brazil, India, and China... some snippets
- Banks in the biggest emerging markets are losing the confidence of investors as loans turn sour after a two-year credit binge.
- Brazil’s financial shares have lost more this year than counterparts in crisis-stricken Europe as consumer defaults hit a 12-month high in June and borrowing costs climbed to 46 percent.
- Bank stocks in China are trading at lower valuations than global emerging-market indexes for the first time since 2006. The country faces a financial crisis with bad debt that may jump to 30 percent of total loans, Fitch Ratings said.
- Chinese lenders expanded credit at a record pace in 2009 and 2010, making more than 17.5 trillion yuan ($2.7 trillion) of new loans as the government moved to offset a collapse in exports during the global recession. The surge in loans exceeded credit expansions in the U.S. before its financial crisis, in Japan before its stock and property bubbles collapsed in 1990 and in South Korea before the Asian financial crisis of the late 1990s, according to Fitch.
- About a third of local government financing vehicles, used to get around laws prohibiting direct borrowing, don’t have cash flow to service their debt, according to China’s banking regulator.
- In India, the cost of insuring banks against default has climbed to the highest level in a year. Loan-loss provisions at State Bank of India (SBIN), the nation’s largest lender, rose 77 percent in the first three months of 2011, while net income fell 99 percent.
- Bad loans “are going to rise because we will have to pass on the rate increase,” the bank’s chairman, Pratip Chaudhuri, told reporters in Mumbai after the central bank increased borrowing costs on July 26. “Interest-rate sensitive sectors like real estate and education loans will most definitely be affected,” Chaudhuri said.
- Loans to Brazilian shoppers, Chinese infrastructure projects and Indian developers have fueled the global economic recovery and turned emerging-market banks into some of the world’s biggest companies by market value. Now increased debt burdens threaten growth.
- Brazil’s annual credit-growth rate accelerated to as high as 34 percent in September 2008, the fastest since at least 1995, before moderating. The pace has picked up again, exceeding 19 percent for 11 months through June, central bank data show.
- Loan payments by Brazilian consumers climbed to 26 percent of disposable income in March, up from 24 percent a year earlier. The rising costs of debt signals Brazil’s consumers are “overstretched,” Neil Shearing, a senior emerging-markets economist at Capital Economics in London, wrote in a July 12 report. A retrenchment may drag down Brazil’s economic growth rate to 2.5 percent in 2013, from 7.6 percent last year, according to Shearing.
- “The people doing the borrowing are the people in the lower echelon in terms of income, and that’s worrisome,” Simon Nocera, a co-founder of San Francisco-based hedge fund Lumen Advisors LLC and a former economist at the IMF, said in an interview. Nonperforming loans “will be higher than previous credit cycles.”
Russia is showing some issues as well:
- Lenders in other emerging economies are also showing signs of stress. Bank of Moscow needed the biggest bailout in Russian history last month after racking up at least 150 billion rubles ($5.4 billion) of unsecured bad loans. The $14 billion rescue of the country’s fifth-largest bank signaled Russian lenders’ health may be “substantially worse” than most investors judge