• Commercial Real Estate: The $3.4 trillion outstanding in debt backed by office buildings, shopping malls and other commercial real estate is easily large enough to pose a real threat to the recovery.
The Moody’s/REAL Commercial Property Price Index has lost 43% of its value since peaking in 2007, recently falling to its lowest level since 2002. As commercial property values fall, debt defaults rise.
This problem has been well-telegraphed and will likely take a long time to unwind—through 2012, according to Guy LeBas, fixed-income strategist at Janney Capital Markets. That might lessen the impact on financial markets.
But much commercial real-estate debt is held by regional banks that aren’t too big to fail and that, during this slow unwinding, might be hesitant to lend more money. That should, at the very least, keep the brakes on the economic recovery.
• Consumer Credit: Another risk for bank balance sheets is the nearly $900 million in credit-card debt outstanding.
Roughly a third of that debt might be owed by high-risk, subprime borrowers, according to various estimates.
• Municipal Debt: The $3 trillion market for the debt of local governments seldom experiences defaults. But when it does, it draws attention, as when Orange County, Calif., defaulted in the 1990s and when Jefferson County, Ala., came close to default last year.
Rising unemployment and falling property values have hurt municipal tax receipts and raised worries about default risk. After rallying 30% from its October 2008 bottom, the Bond Buyer’s Municipal Bond Index has fallen 5% since peaking this September, while other assets have continued to rally.
Worries about paying debts and other bills are leading to deep cost-cutting by local governments, another drag on the economic recovery.
• More housing trouble: Meanwhile, millions of U.S. residential mortgage foreclosures still in the pipeline.
Nearly 10.7 million homeowners, or roughly 23% of the total, owe more money on their mortgages than their homes are worth, according to real-estate information company First American CoreLogic.
Anywhere from three million to seven million mortgages might be in the foreclosure pipeline, according to various estimates.
• Sovereign Debt: Even if the entire government of Dubai defaults, that would still represent just $80 billion in debt, hardly earth-shattering. But Dubai is not the only sovereign issuer with troubles.
Every episode of sovereign worry raises market fears of contagion, “reminders that pockets of post-credit-excesses are intact and destabilizing,” Gluskin Sheff chief economist David Rosenberg told clients on Friday.
To put the discussion of Dubai World’s loan default into context, the WSJ has an overview of the overhang in several of the largest credit and debt markets.