The next big market shock will come from unbearable corporate debt


The bloody bath in the markets occupies the headlines after the coronavirus threatens companies’ profits and economic growth. But the biggest dangers lie in an otherwise quiet debt market, the AP reports.

Investors fear that companies that have drawn huge loans – especially in the energy, aviation and cruise sectors – will not be able to pay off their debts after consumers refuse to travel and close at home. The closure of a number of businesses also reduces electricity consumption and puts more pressure on indebted oil companies.

The amounts are huge.

Companies outside the US financial sector owe $ 9.6 trillion. – 50% more than a decade ago. Globally, companies have issued $ 13 billion worth of bonds, according to the OECD – double compared to 2008. In China alone, corporate debt rose from almost zero to $ 590 billion.

Adding what companies owe to banks and other lenders, the debt rises to a scary $ 75 trillion. worldwide, at $ 32 trillion. in 2005, according to the Institute of International Finance.

Faced with the inability to make debt payments due to the pressure of the economic downturn caused by the virus, companies are more likely to lay off employees, delay investment and reduce costs. All this can exacerbate any economic downturn.

Optimists point out that banks are in better shape today than they were in 2008, when millions of households were burdened with mortgages that they couldn’t pay. And the central banks are trying to reduce the damage.

I don’t think a situation like 2008 or 1929 will be created when we talk about The United States, “said famed economist Kenneth Rogoff.

Over the last decade, however, companies have accumulated debt to take advantage of record low interest rates. Many of them used the funds not to hire new employees or grow their business, but to pay dividends to shareholders or buy back their shares. And now the problems are visible: in the US, bonds of popular names such as Macy’s and Kraft Heinz have been declared junk.

Cruise line bonds sank along with the shares of the same companies. Airlines are not facing “immediate risk” so far, according to analyst Philip Bagali. “But this is a new virus and is more widespread than previous viruses, such as SARS or swine flu, so it is difficult to make a short-term prognosis“.

Companies sell bonds for tens of billions every month. That pace slowed and almost stopped at the end of February. In the last week this month, no US company has sold new debt, according to S&P, an unprecedented situation.

Stopped sales coincide with dangerous times for many businesses. Oxford Economics recently warned that the maturity of US corporate debt is $ 4 trillion. will come in the next five years. Corporate America often releases new bonds to cover its old debt.

High levels of indebtedness make the corporate sector in key economies, including the US, particularly vulnerable to severe economic slowdown“warns Jesuar Prasad, a former top economist at the International Monetary Fund.

On the Wall Street this week, the bond market turned into uncontrollable chaos after a dispute between Saudi Arabia and Russia plunged oil prices. The US energy industry is particularly vulnerable.

Overall, corporate bond quality has declined in recent years, suggesting more defaults. Bonds rated BBB – one step above junk – account for 54% of total investment-grade bonds. In 2008, this share was 30%.

If rating agencies downgrade a BBB issue, a number of investors will want to sell, creating even more market tensions.

The oncoming debt tsunami

The oncoming debt tsunami

Governments must act. Otherwise this time the damage will be much more

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