IMF claims global economy faces $19tn corporate debt timebomb
In its half-yearly update on the state of the world’s financial markets, the IMF said that almost 40% of the corporate debt in eight leading countries – the US, China, Japan, Germany, Britain, France, Italy, and Spain – would be impossible to service if there was a downturn half as serious 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 firms to borrow more, even though many would have trouble paying it back.
Officials at the Washington-based organisation fear that the buildup of debt makes the global financial system highly vulnerable and are telling member states not to repeat the mistake of the early 2000s, when warning signs of a possible market meltdown were ignored.
The IMF said share prices in the US and Japan appeared to be overvalued, while the credit spreads in bond markets – the compensation demanded by investors against risk – seemed to be too low, given the state of the global economy.
Tobias Adrian and Fabio Natalucci, two senior IMF officials responsible for the Global Financial Stability Report, said: “A sharp, sudden tightening in financial conditions could unmask these vulnerabilities and put pressures on asset price valuations.”
In a blogpost published alongside the GFSR, Adrian and Natalucci noted: “Corporations in eight major economies are taking on more debt and their ability to service it is weakening. We look at the potential impact of a material economic slowdown – one that is half as severe as the global financial crisis of 2007-08. Our conclusion is sobering: debt owed by firms unable to cover interest expenses with earnings, which we call corporate debt at risk, could rise to $19tn. That is almost 40% of total corporate debt in the economies we studied.”
Regulations for banks have been tightened up since the financial crisis of 2008 but the IMF says the risk has migrated elsewhere, including to the corporate sector. It believes countries need to look again at giving tax breaks on debt interest payments, which it believes encourages companies to raise money through borrowing.
Adrian and Natalucci said the cheap money policy adopted by central banks was helping to boost financial markets in the short-term but, by encouraging investors to take more chances in the quest for higher yields, risked instability and lower growth in the medium-term.
“Investors have interpreted central bank actions and communications as a turning point in the monetary policy cycle. About 70 per cent of economies, weighted by GDP, has adopted a more accommodative monetary stance. The shift has been accompanied by a sharp decline in longer-term yields. In some major economies, interest rates are deeply negative. Remarkably, the amount of government and corporate bonds with negative yields has increased to about $15tn,” the pair said.
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