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”.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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”.
-
Tesla seeks approval to supply electricity to UK homes – could it disrupt the energy market?Tesla has applied for a license to supply UK households with electricity, but taking on the biggest providers could prove challenging
-
Most Brits unaware onshore bonds can help beat inheritance tax – here’s howA little-known perk of certain types of bonds can let your loved ones off the hook when it comes to inheritance tax – but two-thirds of people have never heard of them
-
Can Donald Trump fire Jay Powell – and what do his threats mean for investors?Donald Trump has been vocal in his criticism of Jerome "Jay" Powell, chairman of the Federal Reserve. What do his threats to fire him mean for markets and investors?
-
Freetrade’s new easy-access funds aim to beat top savings ratesFreetrade has launched an easy-access exchange traded fund (ETF) range - here’s how the ETFs work and how they compare to the savings market
-
Go for value stocks to insure your portfolio against shocks, says James MontierInterview James Montier, at investment management group GMO, discusses value stocks and slow-burn Minsky moments with MoneyWeek.
-
Halifax: House price slump continues as prices slide for the sixth consecutive monthUK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
-
Pension savers turn to gold investmentsInvestors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
-
Where to find the best returns from student accommodationStudent accommodation can be a lucrative investment if you know where to look.
-
The world’s best bargain stocksSearching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
