$75 trillion corporate debt could fuel next financial crisis

The next crisis will be a debt-fueled one.

Skyrocketing corporate debt may help incite the next global economic collapse, says a new report from credit rating firm Standard & Poor’s. Because the Federal Reserve and other central banks around the world have encouraged banks to lend and businesses to take on massive loads of debt, corporate debt may soar to $75 trillion by 2020, up from today’s $51 trillion.

Interestingly enough, the $75 trillion is a conservative estimate because of two things: central banks are the ones purchasing corporate bonds to increase their debt appetite and the last resort policy of helicopter money may be on the horizon (SEE: Central banks will try latest monetary policy tool: Helicopter Money). In other words, that $75 trillion may just be a drop in the bucket.

“A worst-case scenario would be a series of major negative surprises sparking a crisis of confidence around the globe. These unforeseen events could quickly destabilize the market, pushing investors and lenders to exit riskier positions (‘Crexit’ scenario). If mishandled, this could result in credit growth collapsing as it did during the global financial crisis,” the S&P said in its report released Wednesday.”

“Central banks remain in thrall to the idea that credit-fueled growth is healthy for the global economy. In fact, our research highlights that monetary policy easing has thus far contributed to increased financial risk, with the growth of corporate borrowing far outpacing that of the global economy.”

Financial experts say that the only way to avoid a financial crisis in the near future is if there is an immense reduction in debt. However, the likelihood of that happening is slim because of low and negative interest rates and tepid global economic growth. With enormous credit expansion in the last decade, businesses, governments and central banks have overextended themselves.