We've discussed the economic impact of debt many times before in these pages. The latest warning is no exception . . . except that the situation appears to be getting worse.
Corporate debt has reached extreme levels across much of the world and now far exceeds the pre-Lehman financial bubble by a host of measures, the global banking watchdog has warned in a deeply-disturbing report.
“As the credit cycle ages, following years of record-setting bond issuance, there are growing concerns about signs of stress in corporate balance sheets,” said the Institute of International Finance in Washington.
The body flagged a double threat: a five-fold rise in company debt to $25 trillion in emerging markets over the past decade; and record junk bond issuance in US and Europe, along with shockingly-irresponsible levels of US borrowing to buy back shares and pay dividends.
The warning came as the Hong Kong Monetary Authority aired its own grim concerns that the global system is dangerously over-stretched after years of easy money, with Asia’s entire financial edifice potentially in danger.
. . .
The IIF said the ratio of net debt to earnings (EBITDA) for US companies has doubled to 1.4 from 0.7 at the top of the subprime bubble in 2007. Firms continued to borrow as if there were no tomorrow even after their profits began to crumble in 2014.
“For the most part, this very significant amount of debt has been used to pay dividends, buy back shares and fund M&A transactions, rather than financing capital spending, which has been on a declining trend since 2012 (and fell 3.5pc in the first quarter on 2016)," it said.
Companies on both sides of the Atlantic have issued $1.9 trillion of junk bonds over this cycle, with volumes running at double the pre-Lehman pace.
The weakest CCC-rated debt has grown in share and is already under stress, with yields spiking to 20pc in February. “The number of corporate defaults has reached the highest level since the financial crisis. It is not restricted to the energy sector,” said the report.
. . .
What emerges is a split market, divided into cash-rich giants and an army of smaller companies up to their necks in debt. Total corporate leverage is 70pc of GDP in the US and 100pc in Europe.
Excesses in emerging markets are even greater, concentrated in Turkey, Brazil, Russia, and Indonesia, and above all in China where it has reached 175pc of GDP “This is the highest ratio in the world,” said the IIF.
This has happened even as the rate of return on equity in emerging markets collapses – from 18pc to 12pc since 2010 – and the efficiency of new credit halves. Earnings of Chinese firms listed in Shanghai have fallen 10pc in the last year.
There's more at the link.
If we ran our household budgets the way some companies (and nations) run their affairs, we'd all be bankrupt and in the streets.
Peter
And as is usual in any crash (when it comes), the world bankers will be able to scoop up even more of the world's financial and physical resources.
ReplyDeleteThe fiat money inflation/depression cycle, the natural consequence of theft by official counterfeiting. When the supply of money can be manipulated by those who benefit from doing so the real function of money, facilitating trade and prices defining supply and demand, is debased and distorted so malinvestment is rampant and shows in the economy as untenable expanding debt. When the supply of money is treated as something to be manipulated the real functions of money are destroyed. Government control of the money always ends in debasing the currency, those who clip the coin profit from doing so we who are forced to accept it lose.
ReplyDeleteAre you prepared for the greater depression?
When a company can sell bonds for a lower interest rate than what they can get by putting the money into a CD or similar, the companies would be foolish not to do so.
ReplyDeleteThe bad thing is what this says about the people/organizations that are buying these bonds.
Peter, have you read The Creature from Jekyll Island? If so, (you probably have) what are your thoughts?
ReplyDeleteOne of my fellow bloggers told me about it and I have been listening to the "audible" version during am and pm commute. It should be required reading for everyone. It's amazing the volume of money that has been created and spent and wasted. All to line the pockets of the already wealthy at thd expense of the taxpayers. I can't imagine anyway of fixing this without millions of deaths and bloodshed during total collapse.
I'm only a few chapters in but it is without a doubt sad what has gone on.