The IMF’s global financial stability report, released in October, once again drew attention to the build-up of speculative and at-risk corporate debt in large economies, notably the US and Europe.
Debt owed by companies whose earnings are insufficient to cover interest payments (debt-at-risk) and speculative-grade debt are already elevated in several major economies.
It is hardly news that in a world of repressed rates this risky credit has been underpriced and oversupplied.
However, the IMF now finds that, thanks to low-cost, easy terms and competition to lend, rising problem debt could soon exceed crisis-era levels should trade tensions and slowing growth lead to an economic downturn much milder than the one that followed the global financial crisis (GFC).
It wouldn’t take a wild decline in profits or rise in debt service costs for risky corporate debt in the US, UK and China to surpass levels seen in the GFC and to approach those crisis levels in France and Spain.
Add in weakening credit in Japan, German and Italy, and, on aggregate across those eight economies, debt-at-risk would amount to $19 trillion, or nearly 40% of total corporate debt, in the downturn the IMF models in 2021.