The world is drowning in corporate debt

The world’s $74trn “ocean of corporate debt” contains many hidden perils which could infect the wider financial market

What happens when a once-in-a-century pandemic hits an economy “saddled with record levels of debt”? In 2008 the problem was household and banking debt. Today it is corporations, says Ruchir Sharma in The New York Times.

At roughly $16trn, US corporate debt is worth 75% of GDP, with the vehicle, hospitality and transport sectors looking especially vulnerable. One in six US firms do not generate enough cash flow to cover debt interest payments, says Sharma. They avoid bankruptcy only so long as they can secure cheap refinancing. Such zombies are “the natural spawn of a long period of record low interest rates”. Investors reaching for yield have been forced to put their money into bonds backed by ever riskier ventures. 

It’s not just America. The world’s $74trn “ocean of corporate debt” contains many hidden perils, says The Economist. Data from the Institute of International Finance shows that global non-financial corporate debt rose from 84% of GDP in 2009 to 92% last year. In America, two-thirds of non-financial corporate bonds are rated as “junk”, or just above junk at “bbb”. 

A back of the envelope “cash-crunch stress test” suggests that almost one quarter of global listed firms outside China would run out of cash within six months should their sales fall by two-thirds. Europe’s unprofitable banks are a notable area of concern. If they are to get through the next few months then the world’s businesses will require a giant “bridging loan”.

The big fear is that contagion from corporate junk could infect the wider financial market, amplifying the ongoing shock and generating a repeat of the 2008 credit crunch. Such contagion would be a disaster at a time when businesses are tapping credit lines for emergency cash, says Robert Burgess on Bloomberg. On this score, however, there is room for optimism. The Fed’s emergency liquidity injection last weekend saw overnight funding costs for banks plunge on Monday after they spiked to levels not seen since 2008 at the end of last week. The Fed might not be able to put a floor under equities, but if it can ensure that the financial plumbing is working properly and that banks are happy to keep doing business with each other, then “a big worry” is “off the table”.

Recommended

Budget 2021: the chickens come home to roost
Budget

Budget 2021: the chickens come home to roost

Rishi Sunak delivered his budget today amid a fragile and uncertain time. Max King analyses.
27 Oct 2021
Budget 2021: Here is what Chancellor Rishi Sunak announced
Budget

Budget 2021: Here is what Chancellor Rishi Sunak announced

Rishi Sunak delivered his much anticipated Budget today. David Prosser explains what it means for you.
27 Oct 2021
How to invest as oil prices keep heading higher
Commodities

How to invest as oil prices keep heading higher

Oil prices are soaring reversing a sharp meltdown seen at the depths of the Covid-19 crisis. Saloni Sardana explores how you can play the market.
27 Oct 2021
When investors get over-excited, it’s time to worry – but we’re not there yet
Sponsored

When investors get over-excited, it’s time to worry – but we’re not there yet

When investors are pouring money into markets, it can be a warning sign of impending disaster, writes Max King. So how are fund flows looking right no…
26 Oct 2021

Most Popular

Properties for sale for around £1m
Houses for sale

Properties for sale for around £1m

From a stone-built farmhouse in the Snowdonia National Park, to a Victorian terraced house close to London’s Regent’s Canal, eight of the best propert…
15 Oct 2021
How to invest as we move to a hydrogen economy
Energy

How to invest as we move to a hydrogen economy

The government has started to roll out its plans for switching us over from fossil fuels to hydrogen and renewable energy. Should investors buy in? St…
8 Oct 2021
Emerging markets: the Brics never lived up to their promise – but is now the time to buy?
Emerging markets

Emerging markets: the Brics never lived up to their promise – but is now the time to buy?

Twenty years ago hopes were high for Brazil, Russia, India and China – the “Brics” emerging-market economies. But only China has beaten expectations. …
18 Oct 2021