DAILY TRIFETCTA: Bets On Debts

TITLE: Wall Street Bet Big on Used-Car Loans for Years. Now a Crisis May Be Looming.

EXCERPT: The first warning sign came in late February, when a company called American Car Center, which offered loans to customers with troubled credit histories, abruptly closed its 40 dealerships across the South and filed for bankruptcy protection. Then in April, another lender called U.S. Auto Sales also collapsed, shuttering dozens of dealerships in several states.

Before long, S&P Global Ratings put American Car Center and two other major subprime auto lenders — Exeter Finance and United Auto Credit — on watch for potential ratings downgrades.

Driving much of the concern are delinquencies. Today, the number of subprime borrowers who are behind on their auto-loan payments by 60 days or more is the highest it’s been since at least 2017, according to reports from multiple ratings agencies. Defaults are climbing too.

American Car Center executives did not respond to ProPublica’s interview requests. A representative for York Capital Management, the private-equity firm that has controlled the company since 2016, declined to answer questions about the subprime lender. Neither Milestone Partners, the private-equity firm that owns U.S. Auto Sales, nor Adam Curtin, the executive who oversaw it, responded to requests for comment.

The companies’ closures, as well as Wall Street’s souring financial forecasts, represent what appears to be the end of a hot three-year run in the used-auto sector, a rally driven partly by supply chain problems. With a shortage of new cars, consumers turned to used ones. Spending was fueled by pandemic-era federal aid, which helped American households cover their bills, including monthly car payments.

Lenders then used that steady revenue to fund a massive increase in new loans, particularly to people with low or even nonexistent credit scores. As a result, since 2020, the nation’s auto-loan balance jumped 28% and now totals more than $1.5 trillion, making it the fastest-growing type of consumer debt in the U.S., according to data from the Federal Reserve Bank of St. Louis.

Auto bonds increased in kind, as lenders packaged those loans together and sold them as securities on Wall Street, where ratings agencies labeled them as largely safe investments. According to Bloomberg News, lenders sold bonds containing $76 billion in subprime loans in 2021 and 2022. All of this was predicated on the belief that the vast majority of borrowers would continue to make their monthly payments. “Investors are always thinking they’re protected,” said Joseph Cioffi, a partner at Davis+Gilbert in New York who specializes in finance and corporate insolvency. “And the lenders didn’t seem like there was any concern either.”

Economic conditions, however, changed. Pandemic aid ended, and the Federal Reserve aggressively increased interest rates to combat inflation, meaning more and more people are struggling to pay their expensive loans.

TITLE: Crisis and Bailout: The Tortuous Cycle Stalking Nations in Debt

EXCERPT: As the global financial system struggles to restructure hundreds of billions of dollars in existing debt, the question of how to avoid the debt trap in the first place remains more urgent than ever.

Large chunks of money are required to invest in desperately needed roads, technology, schools, clean energy and more. But dozens of countries lack the domestic savings needed to pay for it, and grants and low-cost loans from international institutions are scarce.

So governments turn to international capital markets, where investors are foraging the world for high returns. Both political leaders and investors often look for short-term wins, whether in the next election or earnings call, said Martin Guzman, the former finance minister of Argentina who handled his country’s debt restructuring in 2020.

This free flow of capital around the globe has resulted in a flood of financial crises. “Inequality is embedded in the international financial architecture,” a United Nations Global Crisis Response Group concluded in an analysis.

Even worthy investments — and not all of them are — don’t always generate enough revenue to repay the loans.

When bad times hit or foreign lenders get spooked, governments are left in the lurch. This process can be accelerated in Africa, where research has found there is an exaggerated perception of risk, which lowers credit ratings and raises financing costs.

Without a safety cushion to fall back on, a small government cash crunch can turn into a disaster. Think of a household in a tough stretch that can’t cover next month’s rent and gets evicted. Now instead of being a few hundred dollars in debt, they are homeless.

“For us,” said Ken Ofori-Atta, Ghana’s finance minister, a credit downgrade “means shutdown.”

TITLE: Peak China? Jobs, local services and welfare strain under economy’s structural faults

EXCERPT: Several factors have contributed to the unusually high youth unemployment rate. Education, real estate and technology – industries that graduates previously flocked to – have been hit by a regulatory storm in recent years which annihilated millions of jobs. And during the Covid-19 pandemic, more students stayed in education while the jobs market was all but frozen, leading to a pent-up supply of recent graduates on the jobs market.

But the bigger problems for the Chinese economy may be structural. Most of the people in the youth unemployment cohort are not recent college graduates but school leavers who are unable to get the types of service-sector jobs that have previously kept China’s cities buzzing. Millions of would-be hospitality workers, security guards, couriers and nannies are unemployed. Educated, creative college graduates going without work is a problem for a “politically significant part of the workforce”, says Eli Friedman, a professor who focuses on Chinese labour issues at Cornell University, but the fact that people are not finding more low end jobs is the “big concern”.

Since 2013, as factories have moved to countries with cheaper labour, the number of people employed in manufacturing has been in decline. That has led to an “era of polarisation”, according to a study published by economists at Stanford and Wenzhou universities, in which wages have risen for high-skilled professionals, while the surplus of workers at the low-skilled end of the economy has driven down wages.

Between 2004 and 2019, the share of people working in China’s cities in the informal sector grew from 33% to about 60%. As well as contributing to yawning inequality, this hampers China’s ability to boost its productivity rates. “You don’t turn yourself into a high-income country with [close to] 70% of your economy in the informal sector,” says Scott Rozelle, an economist who led the wage polarisation study.