Global economy faces $19 billion ticking time bomb of corporate debt, IMF warns | International Monetary Fund (IMF)
Low interest rates are encouraging businesses to take on debt to a level that risks becoming a $19,000,000 (£15,000,000) ticking time bomb in the event of another global recession. International Monetary Fund said.
In its biannual update on the state of global financial markets, the IMF said nearly 40% of corporate debt in eight major countries – the United States, China, Japan, GermanyBritain, France, Italy and Spain – would be impossible to serve if there was a downturn half as severe as that of a decade ago.
The IMF noted that the stimulus provided by central banks in both developed and developing countries had the side effect of encouraging companies to borrow more, even though many would find it difficult to repay.
Officials of the Washington-based organization fear that the accumulation of debt could make the global financial system very vulnerable and ask member states not to repeat the mistake of the early 2000s, when the warning signs of ‘a possible market collapse have been ignored.
The IMF said share the prices in the United States and Japan looked overvalued, while credit spreads in bond markets – the compensation investors demanded against risk – looked too low, given the state of the global economy.
Tobias Adrian and Fabio Natalucci, two senior IMF officials responsible for Global Financial Stability Reportsaid: “A sharp and sudden tightening of financial conditions could expose these vulnerabilities and put pressure on asset price valuations.”
In a blog post published alongside the GFSR, Adrian and Natalucci noted: “Companies in eight major economies are taking on more debt and their ability to repay it is weakening.
“We examine the potential impact of a significant economic downturn – a downturn half as severe as the global financial crisis of 2007-08. Our sobering conclusion: debt owed by companies unable to cover their interest charges with earnings, which we call corporate debt at risk, could be as much as $19 trillion. That’s nearly 40% of total corporate debt in the economies we studied.”
Banking regulations have been tightened since the 2008 financial crisis, but the IMF says risk has migrated elsewhere, notably to the corporate sector. He says countries need to again consider giving tax breaks on interest payments on debt, which he says encourages companies to raise money by borrowing.
Adrian and Natalucci said the cheap money policy adopted by central banks was helping to stimulate financial markets in the short term but, by encouraging investors to take more risk in the search for higher returns, risked instability. and lower medium-term growth.
“Investors interpreted central bank actions and communications as a turning point in the monetary policy cycle. Around 70% of economies, weighted by GDP, adopted a more accommodative monetary policy. This change was accompanied by a sharp drop in longer-term yields. In some major economies, interest rates are deeply negative. Remarkably, the amount of negative yielding government and corporate bonds increased to around $15 billion,” the pair said.
Over the past six months, they added, vulnerability has increased among financial institutions that are not classified as banks, such as pension funds and insurance companies. Risks were “high” in 80% of economies, measured by GDP, with systemically important financial sectors – a level similar to the height of the financial crisis.
“The very low rates have prompted institutional investors like insurance companies, pension funds and asset managers to seek yield and buy riskier and less liquid securities to generate targeted returns,” said Adrian and Natalucci.
“For example, pension funds have increased their exposure to alternative asset classes like private equity and real estate. What are the possible consequences? Similarities in investment fund portfolios could amplify a market sell-off, and illiquid investments by pension funds could limit their traditional stabilizing role in markets. In addition, cross-border investments by life insurers could cause spillover effects on the markets. »