Coronavirus May Light Fuse on ‘Unexploded Bomb’ of Corporate Debt

Since 2008, corporations worldwide have issued about $1.8 trillion in new bonds each year, a pace roughly double the previous seven years, according to the O.E.C.D. Bond sales slowed in the latter half of 2018, as central banks lifted rates. But as central banks last year lowered rates anew, the debt binge resumed.

The International Monetary Fund last year examined the situation in eight countries including the United States, Japan, China and several European nations. It warned that a shock only half as severe as the global financial crisis would put nearly 40 percent of total corporate debt at risk, meaning that companies would not be able cover their payments with earnings alone.

Not everyone is sounding the alarm. “The prophets of doom who thought that more debt was more risk have generally been wrong for the last 12 years,” said Nicolas Véron, a senior fellow at the Peterson Institute for International Economics in Washington. “More debt has enabled more growth, and even if you have a bit more volatility, it’s still net positive for the economy.”

In contrast to the financial crisis of 2008, few today are worried about the banking system, which holds capital to cover bad loans. The best-financed companies like Apple, Google and Facebook have hundreds of billions of dollars in cash, making them essentially immune to whatever reckoning may lie ahead.

But even some who praise central banks for rescuing the world from catastrophe argue that easy money has outlived its usefulness. Years of loose credit have enabled weak companies to stave off extinction.

Article source: https://www.nytimes.com/2020/03/11/business/coronavirus-corporate-debt.html