Subscribe to EIR Online


Commodity Debt Is Subprime Debt in Financial Meltdown

Feb. 19, 2016 (EIRNS)—The size and shape of the debt collapse going on in the Wall Street financial system are presented again in a Bloomberg News column today, "Commodities’ $3.6 Trillion Black Hole." Here, the blow-out of $1 trillion in "high-yield" or junk oil/gas debt, is subsumed by "Bloomberg Gadfly" columnist Christopher Langner in the bigger blow-out of commodity debt: the "MBS/derivatives meltdown" of 2016.

Since 2008, with continuous zero-interest-rate money being printed by the trans-Atlantic and Japanese central banks, the 5,000 largest commodity companies (oil & gas, metals & mining, iron & steel) doubled their debt to $3.6 trillion; within that, metals & mining nearly tripled its debt; oil & gas nearly quadrupled it in seven years.

The result is that whereas in 2010, those companies in total had more annual operating income than debt (debt was equal to about 10 months of earnings), now their debt is equal to 8.3 years’ worth of current earnings.

On top of that huge leverage is another $1.5 trillion in securitization—largely added by British and Hong Kong banks in the huge "carry trade" into China on the back of China’s vast production and use of commodities for industrial development — and $40 trillion nominal value of commodity derivatives and credit derivatives on commodity companies.

Commodity prices have fallen to a 25-year low and have now stayed there for a full year. This debt is not being serviced; 47% of it has been downgraded one or more times by S&P in the past year. Default rates on commodity debt are already in the range of 15% of the total. A Bank of America analysis (not mentioned by Langner) states that "corporate balance sheets are the most unhealthy they have ever been (all-time high leverage in HG [high-grade, or investment grade—ed.] and HY [high-yield, or junk—ed.)."

And what about Wall Street balance sheets? Langner estimates that "investors," including shadow-bank funds of all kinds and pension funds, hold $2.1 trillion of this basic commodity debt; banks hold $1.5 trillion of the debt and are exposed to the vast majority of the derivatives.

He concludes by estimating that $1.5 trillion in basic commodity debt is only 1.5% of the trans-Atlantic and Japanese banks’ total assets—but subprime mortgage instruments were less than 1% of their assets in 2008.

Back to top