Drowning in Corporate Debt

The International Monetary Fund (“IMF”) has expressed its concern over the amount of increasing global corporate debt. The cut in interest rates by Central Banks has made corporate borrowing very attractive. But there are risks, and the IMF has warned about them in the past. Central Banks’ continuing policies of easy lending have pushed corporations into risky borrowing situations.

The corporations that are raising their level debt are mostly those operating in large, major economies. With an anticipated economic slowdown, the ability of these corporations to service these rising debts is becoming questionable. The problem could come close to rivaling the economic crisis of 2008.

Corporate debt has risen to an alarming $19 trillion. Almost half of this amount comes from major economies such as the United States, China, Great Britain, Italy, France, Germany, and Spain. The IMF is right to sound the alarm. 

In the U.S., the Federal Reserve Bank is continuing to keep interest rates low in view of possible political upheaval and trade wars. Other central banks, in Europe and Japan, have deliberately instituted a negative interest policy to encourage further borrowing. The IMF is also concerned that low or negative interest rates will increase borrowing and the general corporate debt level in emerging countries. Corporate debt in these countries has reached 160 percent of total exports. In 2008, exports in these same economies equaled only 100 percent of corporate debt. This trend of rising debts could become a serious problem in the event of even the slightest economic downturn.

While global banks have kept interest rates low as an artificial economic stimulus, the risk of a high number of loan defaults could send global economies back into a 2008-like crisis as corporations are becoming increasingly vulnerable in an uncertain global economy. The IMF is sending out warnings regarding the dangerous accumulation of corporate debt. The question is, is anyone listening?
While banks have faced increasing regulations following 2008, the corporate section has been left increasingly vulnerable. According to the IMF, providing tax incentives on loan interest payments could help corporations with huge debts.

The nonfinancial corporate debt of major U.S. companies has reached $10 trillion. This is almost 50 percent of GDP. This is a 50 percent increase from corporate debt in 2008, when debt comprised 44 percent of GDP.

These numbers don’t take into consideration smaller and family-owned businesses. If these were included, the actual total amount of business debt is currently at $15.5 trillion, or 74 percent of GDP. This rising debt level has encouraged banks to increase their lending, thus only creating more corporate debt.

If this trend of easy credit continues, and more corporations acquire risky loans, defaults and bankruptcies loom large in the future. According to Fitch Ratings, corporate default in 2020 could be as high as $33 billion. The current five-year average default is $22 billion. These numbers indicate that corporations are indulging in more risky loans than ever.

The Federal Reserve’s strategy of easy lending has had the opposite of its desired effect. The economy is not being stimulated. Instead, corporations are being increasingly crushed by an unsustainable debt burden.