Bad news always comes in threes

A three-pronged global financial storm is brewing, and it’s a sure bet resources sales to China won’t bail WA out this time.

The political noise associated with the federal election is swamping daily news, which might not be a bad thing because it’s diverting attention from three unpleasant developments in the financial world.

The biggest of the troublesome trifecta is China’s ballooning debt, which has reached an astounding 237 per cent of gross domestic product, causing seasoned investors such as billionaire George Soros to warn that the country is sleepwalking into a disaster.

Of particular concern is that the debt balloon has expanded at a phenomenal rate since the 2008 GFC, a time when debt to GDP stood at 148 per cent.

The near doubling of total debt in eight years has started an international debate about how China can fix its obsession with funding growth through higher borrowing. According to investment bank Goldman Sachs there are only two solutions – a crisis, or a prolonged slowdown in growth.

While a slower China is a risk for Australia, particularly Western Australia, the other two issues worrying financial regulators are the first signs of a breakdown in the emerging business of ‘fintech’, which has manifested itself here as internet lending or as lending clubs, and the struggle by insurance companies to profit at a time of ultra-low interest rates.

Fintech, which is really nothing more than the development of a cheaper way to lend money to small borrowers by directly connecting people with money to people without money, was always going to be a problem because of its low to non-existent checking of borrowers’ credit worthiness – such as their repayment history.

You only have to watch television advertisements for internet lenders – which promise instant cash with minimal credit checking to almost anyone who asks – to know that most people who do apply for quick credit are the people least able to service the loan.

Bad loans made to bad people by bad lenders can only result in distress, and that’s starting to happen in the same place where the last financial crisis occurred (and probably involving many of the same people) – the US.

Fintech has been booming there, as is evidenced by the outrageous success of new quasi-banks such as LendingClub Corporation, which pioneered many of the features seen in lookalikes that have popped up around the world, offering the same promise of generating a high return for investors who provide the money and easy loans to people who borrow.

Many of the people investing in fintech (or lending clubs or another variation called peer-to-peer lending) do so because they believe the new system is snatching a slice of lucrative business from traditional banks, which have largely abandoned small and personal loans.

Most of the people borrowing from fintech firms do so because traditional banks regard them as a credit risk – which they are, and that’s why the banks dumped them in the first place.

It is a recipe made for a disaster with the guarantee of a crisis of the sort that has just swamped the original and biggest of the US fintech firms, LendingClub which has just dumped its founder and chief executive, Renaud Laplanche, after an investigation revealed dodgy internal practices such as altering loan dates.

Just as LendingClub’s problems were developing the US, the Federal Treasury released a paper that questioned ‘new business models’ in the financial sector, because they had been developed at a time of low interest rates and an improving economy but could have problems in a tougher market.

Those tougher conditions have arrived, bringing rising delinquency rates among riskier borrowers and questionable promises in securitised packages of loans – a situation that perfectly mirrors the sub-prime lending disaster that triggered the 2008 financial crisis.

The third financial sector worry is closer to home than many people realise, and comes in the form of sharply higher insurance premiums for everything from home and car insurance to life insurance.

What’s driving premiums up, ironically, is the pressure of falling interest rates on the earnings of insurance companies.

Traditionally, an insurance company earns about half of its profits from premium income and half from its investment portfolio. So, when the investment performance dries up, as it is today thanks to super-low interest rates and declining dividends, insurance premiums rise to compensate – a process that’s just starting.

If it was just one unpleasant development rocking the global financial boat the situation could be called business as usual. Three unpleasant developments is something far more serious.