National debt surpasses $30 trillion for the first time

Total public debt outstanding is now above $30 trillion, according to Treasury Department data published Tuesday.

It’s impossible to know how much debt is too much, and economists remain divided over how big of a problem this really is. But the latest debt milestone comes at a delicate time as borrowing costs are expected to rise.

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“It doesn’t mean a short-term crisis, but it does mean we are going to be poorer in the long term,” said David Kelly, chief global strategist at JPMorgan Asset Management.

Interest costs alone are projected to surpass $5 trillion over the next 10 years and will amount to nearly half of all federal revenue by 2051, according to the Peter G. Peterson Foundation, an organization focused on raising awareness to the fiscal challenge.

Kelly pointed out that rising borrowing costs will limit how much money Washington can spend on other priorities like climate change.

Skyrocketing pile of debt

The federal government now owes almost $8 trillion to foreign and international investors, led by Japan and China. Eventually, that will need to be paid back, with interest.

“That means American taxpayers will be paying for the retirement of the people in China and Japan, who are our creditors,” said Kelly.

The $30 trillion national debt figure is somewhat inflated by the fact that a chunk of the money is owed by the government to itself. This is debt held in Social Security and other government trust funds. So-called intragovernmental holdings total more than $6 trillion.

Still, the national debt has skyrocketed in recent decades, driven up in part by the 2008 financial crisis and then the pandemic.

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Total debt outstanding stood at $9.2 trillion in December 2007 just as the Great Recession was beginning, according to Treasury data.

By the time former President Donald Trump took office, the national debt stood at nearly $20 trillion.

“Covid exacerbated the problem. We had an emergency situation that required trillions in spending,” said Michael Peterson, CEO of the Peterson Foundation. “But the structural problems we face fiscally existed long before the pandemic.

Even before Covid, Trump presided over a sharp increase in the national debt, highlighted by the massive tax cuts enacted in late 2017 — at a time when the US economy was booming and needed no fiscal stimulus. The 2017 Tax Cuts and Jobs Act will add $1 trillion to $2 trillion in federal debt between 2018 and 2025, according to the Tax Policy Center. The center notes that the impact will be even larger if some of the temporary tax cuts are extended.

Political polarization

Peterson said the principal drivers of the “dangerous fiscal situation” remain an aging population and elevated healthcare costs. He blamed Republicans and Democrats alike for running up the national debt.

“Our current fiscal posture is a result of many years of fiscal irresponsibility from both parties. What’s required to get us out of this situation is honesty and leadership from our elected officials,” Peterson said.

Yet there has been virtually no progress in Washington in addressing the national debt ,and the two parties remain deeply divided over many issues.

“The polarization of our government and, to some extent, our population, makes implementing solutions more difficult,” said Peterson. “If we don’t get our fiscal house in order, all these other concerns like climate, inequality and national security will be made more difficult.”

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About two-thirds (67%) of Americans in a CNN poll in December said government spending is a major problem for the nation’s economy, below rising costs for food and everyday items (80% said that was a major problem) and roughly on par with the pandemic (65% said Covid is a major problem).

There is a wide partisan gap on this issue, with 90% of Republicans calling government spending a major problem, compared with 70% of independents and 44% of Democrats.

In 2020, total public debt as a percentage of gross domestic product (GDP) surpassed 100%, years ahead of schedule. For context, Japan’s debt-to-GDP is well beyond 200%.

‘Addicted to government debt’

Federal Reserve Chairman Jerome Powell recently acknowledged the fiscal situation can’t continue on the current trajectory.

“We’re on an unsustainable path,” Powell told lawmakers last month. “Debt is not at an unsustainable level, but the path is unsustainable — meaning it’s growing faster than the economy, meaningfully faster than the economy. We have to address that over time. We will address it over time. And the better way to do it is soon.”

But that won’t be easy — or politically popular. And it will be complicated by the Fed’s planned interest rate hikes.

Even though the national debt continues to hit new milestones, the federal government’s interest payments as a percentage of GDP are lower today than in the past. And that gives confidence to many economists that this is not an immediate crisis.

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In 2021, interest as a percentage of GDP stood at 1.5%, compared with 3% in the early and mid-1990s, according to the St. Louis Federal Reserve Bank.

“I don’t see a short-term meltdown here,” said Kelly, the JPMorgan strategist.

But he said it still makes sense to reduce the national debt — gradually.

“You don’t want to do it too quickly. This is an economy that is addicted to government debt,” Kelly said. “But the danger is that it keeps growing until eventually it does cause a huge problem.”

Evergrande’s debt crisis: International creditors threaten legal action over ‘opaque’ restructuring process

A group of the company’s overseas bondholders are threatening to take legal action over its “opaque” debt restructuring process, the latest sign of trouble for the embattled Chinese developer.

They said in a statement Thursday they’ve had to “seriously consider enforcement actions” after Evergrande failed to engage substantially with them about reorganizing its operations.

The firm’s “lack of engagement and opaque decision-making to date is contrary to well established international standards in restructuring processes of this magnitude,” the group wrote in its statement. The investors are represented by law firm Kirkland & Ellis and investment bank Moelis & Co.

They said the company’s behavior “tarnishes offshore investors’ views” about expecting fair treatment when investing in Chinese companies, and added they are “prepared to take all necessary actions to vehemently defend its legal rights and protect its legitimate interests.”

Evergrande did not respond to a request for comment from CNN Business about the statement, but said in a Friday filing with the Hong Kong Stock Exchange that it would hire more financial and legal advisers to help “follow up” with demands from creditors.

The real estate developer is one of China’s largest and it’s still reeling under more than $300 billion of total liabilities, including about $19 billion outstanding offshore bonds held by international asset managers and private banks on behalf of their clients.

Evergrande has been scrambling for months to raise cash to repay lenders, and the company’s chairman Xu Jiayin has been reportedly selling off personal assets to prop up its finances.
But time seemed to run out for the company last month, when Fitch Ratings declared that Evergrande had defaulted on its debt — a downgrade that the ratings agency said reflected the company’s inability to pay interest due that month on two dollar-denominated bonds.
There’s also evidence that the Chinese government is guiding Evergrande through a restructuring of its debt and sprawling business operations. The company set up a risk management committee last month that is staffed by officials from state-owned enterprises in Guangdong, where Evergrande is based, along with an executive from a major bad debt management firm owned by the central government.
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But international bondholders say they’ve been left in the dark about the company’s plans. The creditors said in their Thursday statement that they have tried to talk with Evergrande, but have received “little more than vague assurances of intent, lacking in both detail and substance.”

“Actions speak considerably louder than words,” they added, saying that the “overriding impression” is that despite the company’s public words, Evergrande “has disregarded its offshore creditors and the legal rights of its creditors.”

The group added that it recognizes Evergrande’s recent efforts in resuming most of its construction projects, and wants “to be a part of a solution” to help “during these hard times.”

Analysts have been long concerned that a collapse by Evergrande could trigger wider risks for China’s property market, hurting homeowners and the broader financial system. Real estate and related industries account for as much as 30% of the country’s GDP.

Chinese policymakers have also made it clear that protecting domestic homeowners are is a priority, as they want to ensure apartments are delivered to customers, many of whom had already paid for properties before they were completed. Last month, Wang Menghui — the Minister of China’s Housing and Urban-Rural Development — told the state broadcaster that enduring the delivery of home projects and protecting people’s livelihoods were among the government’s main goals this year in tackling risks to the real estate sector.
Evergrande has also made deals with domestic creditors to avoid a formal default on its onshore bond. Earlier this month, it obtained investor approval to delay payments on a 4.5 billion yuan ($707 million) bond.

Evergrande has defaulted on its debt, Fitch Ratings says

The credit ratings agency on Thursday downgraded the company and its subsidiaries to “restricted default,” meaning that the firm has failed to meet its financial obligations.

Fitch said the downgrade reflects the company’s inability to pay interest due earlier this week on two dollar-denominated bonds. The payments were due a month ago, and grace periods lapsed Monday.

Fitch noted that Evergrande made no announcement about the payments, nor did it respond to inquiries from the ratings agency. “We are therefore assuming they were not paid,” Fitch said.

Evergrande has about $300 billion in total liabilities, and analysts have worried for months about whether a default could trigger a wider crisis in China’s property market, hurting homeowners and the broader financial system. The US Federal Reserve warned last month that trouble in Chinese real estate could damage the global economy.

Evergrande did not immediately respond to a request from CNN Business for comment. However, the company had warned this may be coming. In a stock exchange filing last Friday, it said it might not have enough funds to meet its financial obligations. At that time, it said it was planning to “actively engage” with offshore creditors on a restructuring plan.

In another filing Monday, the company said it would set up a risk management committee that would be headed by Evergrande’s chairman and founder Xu Jiayin to focus on “mitigating and eliminating” future risks.

Fears of default sent shares of Evergrande plummeting 20% on Monday. So far this year, the stock has lost 87%.

The company had been scrambling for months to raise cash to repay lenders, and Xu has even been selling off personal assets to prop up its finances. It previously appeared to avoid default on any of its offshore bonds by paying overdue interest before their grace periods expired. Now, though, that streak has ended.

Another credit ratings agency, S&P, said earlier this week that “default looks inevitable for Evergrande” with repayments of $3.5 billion on US-dollar denominated bonds due in the coming months.

“The issuer [Evergrande] does not seem to be making much progress in resuming construction, given its difficulties in raising new financing,” S&P Global analysts wrote in a note published Monday.

Chinese authorities have been trying to contain the fallout. Last Friday, the local government in Guangdong province, where Evergrande is based, said it would send a working group to Evergrande to oversee risk management, strengthen internal controls and maintain normal operations, at the request of the company.

The People’s Bank of China and other top financial regulators have tried to reassure the public that Evergrande’s problems can be contained. The central bank on Monday also announced that it would pump $188 billion into the economy, apparently to counter the real estate slump.

“The rights of shareholders and creditors of Evergrande will be fully respected in accordance to their legal seniority,” PBOC governor Yi Gang said Thursday in a video speech to a Hong Kong forum, according to the central bank.

But other Chinese developers are also in trouble. On Thursday, Fitch downgraded the Kaisa Group to “restricted default.”

Evergrande debt crisis: Chairman has sold $1.1 billion worth of his personal assets to prop up the company, Chinese state media reports

Xu has sold several houses in Hong Kong, Guangzhou and Shenzhen, as well as some private jets, the state-owned China Business News reported Tuesday, citing anonymous sources close to the matter.

The cash, which Xu has been pumping into Evergrande since the beginning of July, has been used to “maintain the basic operations of his huge business empire,” the paper reported, adding that the money has been used to pay staff salaries, interest payments on some bonds and cash owed to investors in its wealth product. The money has also gone toward finishing property projects across China.

“So far Xu Jiayin has been personally raising money to continue the life of Evergrande,” the media outlet wrote.

Evergrande did not immediately respond to a request for comment from CNN Business about the report.

Shares in the company rose as much as 4.3% in Hong Kong on Wednesday morning, though by the afternoon they had pared gains and were last up 1.1%. So far this year, the stock is down 80%.

Evergrande has been trying to shed assets to avoid defaults as it grapples with more than $300 billion liabilities, but its efforts have been met with mixed success.

In late September, the company announced that it would sell a $1.5 billion stake in Shenyang-based Shengjing Bank to a state-owned asset management company. But last month, it called off a plan to sell a majority stake in its property management unit for $2.6 billion to rival Hopson Development Holdings. Both companies said they were unable to agree on terms of the deal.

Speculation about Xu’s role in keeping the company afloat has mounted. Bloomberg, for example, reported late last month — citing anonymous sources — that Chinese authorities have told Xu to use his personal wealth to pay the company’s debts.
Xu can presumably only do so much. His personal wealth is valued at about $7.9 billion, according to the Bloomberg Billionaires Index — far less than the hundreds of billions of dollars that Evergrande carries in debt.

So far, though, the company appears to have avoided defaulting on any of its publicly traded offshore bonds by paying overdue interest before grace periods expire for each of those obligations.

It has another deadline coming up for an overdue payment on a dollar-denominated bond. The 30-day grace period for that bond expires November 29, according to Eikon Refinitiv.

Broader debt worries

Other Chinese property developers have also taken a hit as Evergrande’s debt woes continue, with their shares and bonds falling and rating agencies issuing more downgrades. China’s property sector has been suffering from a government campaign to curb excessive borrowing, which began last year.

S&P Global Ratings on Tuesday downgraded the credit rating of China Aoyuan Group, a major developer based in Guangzhou, to junk.

The rating agency said Aoyuan may not have sufficient cash for debt repayment and could face a liquidity crisis soon, as its property sales have plunged and its debt maturities are expected to pile up in 2022.

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The rating action followed similar moves by Fitch Ratings and Moody’s, which both downgraded Aoyuan because of increased liquidity risks facing the company.

China Aoyuan’s shares, which trade in Hong Kong, have plunged more than 30% in the past month.

Fitch Ratings on Tuesday also further downgraded the credit rating of troubled homebuilder Kaisa Group to “C” from “CCC-,” as it believed the firm has missed interest payments on several dollar-denominated bonds due earlier this month. Kaisa’s stock has been suspended from trading in Hong Kong since earlier this month.

A number of other developers are also teetering on the brink, with Shenzhen-based Fantasia Holdings and Beijing-based Modern Land having recently missed bond or loan repayments.