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Commodity plunge increases systemic risks

The drop in commodity prices has put pressure not only on the commodity producing countries but also the companies exposed to the collapse in commodity prices. This was highlighted by the steep decline in Glencore's (one of the world's biggest mining companies) share price this week. The stock tumbled 29% on Monday without any new information and then recovered somewhat in the days that followed.

However, it is still down around 10% on the week. Other mining companies have seen their share prices drop as well but Glencore has suffered most because of the concerns over its high debt levels. The spill over to broader credit markets from the commodity collapse is seen in the wider credit spreads on corporate bonds.

Tighter financial conditions are negative in themselves but the slump in Glencore's shares also highlights the systemic risks arising from the commodity downturn. Such abrupt moves in the stock price without any obvious new information as a trigger is worrying.

"Bankruptcies of debt-laden companies exposed to commodities prices could fuel a vicious spiral of downgrades, financial sector losses and further tightening of financial conditions. This is by no means our base case scenario but a risk that is worth keeping an eye on", says Danske Bank.

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