Corporate bonds and loans are at the centre of a new financial scare

OVER THE past decade officials—and some bankers—have tried to redesign the financial system so that it acts as a buffer that absorbs economic shocks rather than as an amplifier that makes things worse. It faces a stern test from the covid-19 virus and the economic ruptures it has triggered, not least a Saudi-led oil-price war (see next article). The locus of concern is in the world’s ocean of corporate debt, worth $74trn. On Wall Street the credit spreads of risky bonds have blown out, while in Italy, a bank-dominated economy that is already in lockdown, the share prices of the two biggest lenders, Intesa Sanpaolo and UniCredit, have dropped in the past month by 28% and 40% respectively.

The scare has four elements: a queasy long-term rise in borrowing; a looming cash crunch at firms as offices and factories are shut and quarantines imposed; the gumming-up of some credit markets; and doubts about the resilience of banks and debt funds that would bear any losses.

Take the borrowing first. Companies came out of the 2007-09 financial crisis in a relatively sober mood, but since then have let rip. Global corporate debt (excluding financial firms) has risen from 84% of GDP in 2009 to 92% in 2019, reckons the Institute of International Finance. The ratio has risen in 33 of the 52 countries it tracks. In America non-financial...



via The Economist: Finance and economics Business Feeds

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