We are only a few days in to 2016 and it already looks like it will be a rocky year. Famed billionaire investor George Soros is proclaiming that he sees echos of the 2008 crisis in the current market. At an investment event in Sri Lanka recently, Soros mentioned that the extreme debt levels in China, Europe and the US, along with collapsing commodity prices, spelled potential doom for global economy.
According to George Soros and most other investors, the 2008 crisis occurred due to sub-prime debt, over investment in the housing market and too much investment in exotic securitized financial products. Today, the greatest risk is also in bad debt. However, this time the debt is much larger and issue by governments so the risk is much greater.
That is especially true in China. AFter the 2008 crisis, exports to Europe and the US went down dramatically. To boost the economy, the government unleashed a massive amount of lending and fiscal stimulus in to the economy. In fact, the banking system grew to three times the size of the economy whereas the US banking system is one times the economy. At the same time, the growth rate in China is beginning to slow naturally as the population growth slows and incremental technology improvements slow. As a result, it is becoming tougher and tougher to pay off the huge debts that government issued in 2008. Now, new debt growth is slowing and the economy is at a stand still. The stock market already crashed in 2015 and is now crashing again. Unless the government gets a handle on its debt loan, it could spark a contagion around the world.
As debt growth slows around the world and economies put on the breaks, the price of commodities is also collapsing. Many countries that depend on commodities (especially oil and gas) are now have trouble financing their daily operations. Even worse, some of the debt they have issued is in danger.
The countries with the greatest risk of debt default include Venezuela, Zimbabwe and Argentina. However, other much larger countries are showing signs of strains. Brazil contracted 3.5% in 2015 due to the decrease in commodity prices. Also, the fallout from a bribery scandal and massive wasted investment in a major potential oil field by government energy giant Petrobras is giving investors concern about the country’s ability to pay back loans. At a minimum, interest rates are rapidly increasing, causing huge strains in the economy.
Other major oil exporters such as Russia, Saudi Arabia, Kuwait, Norway and Angola have seen massive setbacks in their revenue and are struggling to meet basic needs. These companies may need to issue additional debt to get back on track.
Together, the world is showing increasing strains that Soros warns could lead to another major crisis like 2008. Hopefully, governments can avoid the fallout.