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. 

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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”.

Advertisement - Article continues below

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”.



UK Economy

Coronavirus: Big Brother widens his embrace

The coronavirus crisis has led to a massive expansion of the state into all areas of daily life. Should we be worried?
4 Apr 2020
Global Economy

The charts that matter: recession is here – how deep it will get?

After a week in which US unemployment claims topped six million, John Stepek looks at how the charts that matter most to the global economy are lookin…
4 Apr 2020
Global Economy

The MoneyWeek Podcast – Russell Napier: how much debt is too much?

Merryn talks to financial strategist and author Russell Napier about the huge levels of debt embedded in the global economy, the governmental response…
3 Apr 2020
Global Economy

Don’t forget about consumer debt

It’s not just corporate debt that is out of control. Consumer debt is, too.
3 Apr 2020

Most Popular


Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020

Has the stockmarket hit rock bottom yet?

The world's stockmarkets continue on their wild and disorientating rollercoaster ride. Investors are still gripped by fear. So, asks John Stepek, have…
2 Apr 2020

Oil shoots higher – have we seen the bottom for the big oil companies?

Just a few days ago everyone was worried about negative oil prices. Now, the market has turned upwards. John Stepek explains what’s behind the rise an…
3 Apr 2020