'Black Swans' Lurk, Threatening Global Credit Conditions
As the saying goes, a picture is worth a thousand words.
According to the French bank Societe Generale, there are big risks afoot. And while 'black swans' are rare events that are impossible to predict, once you understand the threats, you can find ways to pre-empt them.
Take a closer look at 4 ‘black swan’ risks threatening global financial markets, on the chart below. And read our analysis, to learn how to mitigate these risks, and protect your company from their potential impacts.
According to the French bank, the four biggest risks facing the global economy include:
- political uncertainty drag (30%);
- a sharp increase in bond yields (25%);
- a hard landing in China (20%);
- isolation and trade wars (15%).
Taking each of these ‘black swan’ risks one at a time, let’s consider the potential impacts on the financial health of your customers and suppliers.
China's Big Credit Risks
China’s economy has the “most significant risks with pockets of significant excess in housing, high debt levels and a burgeoning NPL problem”, according to the French bank. And, the country’s “insufficient” structural reforms pose a further threat to its economy, raising financial risk both in the region and around the world.
S&P Global Market Intelligence summarized China's credit risks this way: “ …the ever-increasing level of corporate debt in China is intensifying risks because of weakening borrower credit quality. The still-high growth rate of debt could lead to potential losses over the next year or two … and, the ratio of problem credits to total credits could double to 10% from our 2015 estimate of 5.6%”.
Global Political Uncertainty
In light of 2016’s economic and political turbulence, it’s no surprise that political uncertainty is the most probable swan on the chart. And while it’s too soon to tell how political talk will play out in terms of future US policymaking, the prospect of more protectionist trade policy adds fresh risk for all businesses involved in global commerce.
On the other side of the Atlantic, there are different political concerns. The EU economy was already sluggish, and risky loans on European bank balance sheets were already a financial concern. But, shifting politics – in particular, lingering policy uncertainty around Brexit’s implementation, and the uncertainty surrounding other EU member elections -- pose added risks that could bode rough times for global customers and suppliers.
Rising Interest Rates and Bond Yields
Another black swan is a rise in rates. Some expect the rise in rates to be gradual. But Societe Generale went as far as to label bond yields the “Achilles’ heel of global markets,” stating that “while market pricing on Fed rate hikes remains modest, there is to our minds significant risk of a more disorderly repricing of global bond yields. Such a scenario could have very negative spillover ...”
In either case, associated higher interest costs could place liquidity stresses on debt-laden companies. The key point: financial professionals need to evaluate the impact on highly leveraged companies that are already financially distressed. (Related: See "Is Your Credit Portfolio Ready For The Next Interest Rate Hike?)
Potential Isolation and Trade Wars
Are your customers and suppliers exporters or importers? New barriers to international trade means your customer’s access to important markets could be impacted, and many companies could end up on less competitive footing.
As well, the supply chain cost efficiencies that we all take for granted could also be eroded. Financial managers should keep eyes on gross margins, and evolving trade agreements.
Staying ahead of the game: are your tools up to the challenge?
Economic growth lifts all boats. On the flip side, these 'black swans' present some significant downside risks. And since your company’s trade is likely global, neither geography nor industry offers much protection to US credit portfolios or supply chains.
How to navigate these uncertain times?
The best weapon you have as a financial leader in your company is increased vigilance. Here's how to make sure your people, tools and technology are ready:
- Start by holding strategic conversations with key customers and suppliers. Learn how they’re being impacted by the changing trade landscape.
- Monitor the financial impact these changes are creating on your counterparties. Remember, knowledge is power -- closely track the warning signs of growing financial distress.
- Use all the tools, technology and data you have at your disposal. The FRISK® financial risk score, our trade contributor program, and related risk management tools can all help you identify and monitor your biggest risks.
Bottom line: The black swan chart may be ominous, but you're still in control. Learn your current portfolio risks, and what you can do to up your company's risk management readiness, to get ahead of economic uncertainty.
Image credit: Business Insider.
CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of over 58,000 global public companies.
At the core of CreditRiskMonitor’s service is its 96% accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z” score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $135 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.