A major credit ratings firm declared that real estate giant China Evergrande was in default on Thursday, creating the potential for the communist country’s financial system to take a significant hit, The New York Times reported.
The firm, Fitch Ratings, said it placed Evergrande under its “restricted default” designation, which means that it had formally defaulted but not yet started a bankruptcy proceeding, liquidation or other process that would stop its operations, the NYT reported.
World markets had been watching Evergrande struggle as it appeared barely able to make required payments of its $300 billion or more in obligations, the NYT reported. An $82 million payment to bondholders was due on Monday, but Fitch said Evergrande had not responded to its request for confirmation on whether the company met the deadline or not.
The lack of response is what caused the change in designation, the NYT reported. Whether Evergrande will declare bankruptcy, a fire sale or business as usual is unknown, but the company’s downward spiral poses significant risks to the Chinese financial system.
“We all expected that Evergrande was not going to be able to pull a rabbit out of their hat,” Michel Löwy, chief executive of SC Lowy, an investment firm that owns a small position in Evergrande bonds, told the NYT. “Now, the ball is in their court to come up with some form of restructuring proposal.”
Foreign investors have historically operated on the assumption that Beijing was willing to bail out its biggest companies, but authorities have recently shown a greater willingness to let them fail, the NYT reported.
The shift is part of an effort to get companies to rein in their unsustainable debt, the NYT reported. China’s central bank blamed Evergrande’s “own poor management and reckless expansion” for the crisis it faces, emphasizing the issues were limited to the company itself.
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