Corporate debt is a bomb about to explode in the United States.
Since the economic collapse, corporate debt has ballooned to $9 trillion, but it has flatlined since the Federal Reserve started to normalize interest rates.
Is it a problem? Not quite says Fed Chair Jerome Powell.
Speaking at the 24th Annual Financial Markets Conference, Powell told the audience:
“Business debt has clearly reached a level that should give businesses and investors reason to pause and reflect. If financial and economic conditions were to deteriorate, overly indebted firms could well face severe strains.”
But this time it’s different!
“However, the parallels to the mortgage boom that led to the Global Financial Crisis are not fully convincing,” he explained.
“First, business debt is near record levels, and recent issuance has been concentrated in the riskiest segments. As a result, some businesses may come under severe financial strain if the economy deteriorates. A highly leveraged business sector could amplify any economic downturn as companies are forced to lay off workers and cut back on investments. Investors, financial institutions, and regulators need to focus on this risk today, while times are good.
Second, today business debt does not appear to present notable risks to financial stability. The debt-to-GDP ratio has moved up at a steady pace, in line with previous expansions and neither fueled by nor fueling an asset bubble. Moreover, banks and other financial institutions have sizable loss-absorbing buffers. The growth in business debt does not rely on short-term funding, and overall funding risk in the financial system is moderate.”
Should rates go higher amid an economic contraction, then just to service the debt will be a monumental task.
JRATT says
Here we go again, just 90 days after this article. With the drop in interest rates of 25 basis points and more to come, corporate debt will climb higher. How many companies will have to file bankruptcy is anyone’s guess, but I think it will soon have a bigger effect on future earnings and employment.