Compound Individual, Public and Corporate debt total 225% of global GDP
John Maynard Keynes once said, “if I owe you a pound, I have a problem; but if I owe you a million, the problem is yours.”
Keynes’ reasoning seems to be the guide being followed by global corporations. When the global debt bomb explodes, corporations, including banks, will not have enough cash in hand to pay back investments.
The previous description regarding the future of the global debt problem was recently highlighted by Mats Isaksson, Head of Corporate Governance and Finances of the Organization for Economic Cooperation and Development (OECD).
“The amount of the debt has increased, its quality has worsened, and the risks have increased,” says Isaksson.
In its latest report, the OECD shows data that invite reflection, because ten years after the financial crisis, after a loose monetary policy by central banks, another source of weakness is emerging: over-indebtedness.
Non-financial companies have opened the tap of debt dramatically
Between 2008 and 2018, global bond issues to finance their activities increased by an average of 1.5 trillion euros each year, when in the previous decade the rate was half.
Four out of five euros of this debt come from companies in the most developed countries and its volume has doubled since 2008. But much of this debt boom is attributable to the expansion of Chinese companies.
In 2008, Chinese firms were practically absent from the debt market. Since 2016, China is the second largest issuer of corporate bonds in the world.
In their case, the numbers, in terms of the volume of titles issued, have been multiplied by four.
Companies located in both advanced economies and emerging countries, added a whopping 11 billion euros of debt in the world, the equivalent of more than half of US GDP.
It is a new historical maximum … with an added problem. Yes, because one-third of this colossal sum will have to be reimbursed or refinanced by 2021.
That is, in the arch of the next three years, for an amount close to 3.5 billion euros. This figure was not seen since 2000 and to give you an idea, it corresponds to the equivalent of the entire annual balance of the US Federal Reserve.
Returning the money in and of itself should not be particularly disturbing, but there are some factors that make this period seem a bit tight.
First, we must discount the general economic context of synchronized slowdown. If the IMF has lowered its forecasts to 3.5% for this year, it means that there is less wealth to take advantage of, less pie to share … and less restitution.
Second, the accommodative policy of the central banks will be forced to change course, sooner rather than later, with the increase in the price of money and the withdrawal of stimuli, such as the purchase of sovereign debt.
This has been repeated several times by the presidents of the ECB and the Fed.
And, third: the debt of the public administrations in 2019 should also set a new historical record, so that the states do not have much room to maneuver to intervene or to sustain the companies in case of difficulty.
To these elements can be added a fourth factor of concern: business debt that circulates around the world today presents a worse quality -corresponding to a BBB grade, just above a level of high risk of bankruptcy.
In other words, an increasing number of these bonds may not be reimbursed because the companies, due to their damaged financial situation, do not have the capacity to do so.
In fact, the OECD ensures that the percentage of these low-quality emissions already reaches 54% of the total, more than half, when a decade ago it was 30%.
Compared to what happened in 2008 at the time of the Lehman Brothers crash, OECD analysts estimate that, if a global shock occurs, some 240,000 million euros worth if bonds could go into the category of speculative investment, or junk.
If in addition we also added the emissions of financial companies, the amount of these doubtful loans could almost double.
The chain effect would be dangerous, because the balance sheets of the companies that hold these securities would be devalued. The market would have difficulty absorbing this loss.
Memories of the crisis are still present and many wonder if there is an analogy with then.
In 2008, the situation was different. But let’s say that if there was a contraction in the economy or a sudden change in monetary policy the impact on the debt market may be stronger than expected,” says Isaksson.
“What emerges, in any case is that the deadlines for reimbursement are tight.” As John Maynard Keynes once said, “If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours. ” Meanwhile, the debt bomb ticks.
“I think the idea that deficits are not important for countries that can take loans in their own currency is wrong,” Says Jerome Powell, President of the US Federal Reserve.
“I think that the debt of the United States is quite high … and, much more important than that, it is growing faster than the GDP, he adds.
Even the head of US monetary policy begins to be somewhat uneasy.
At the last World Forum in Davos, a seminar entitled “The Global Debt Bomb” was held. In it, participants, instead of supporting the most alarmist theses, tried to minimize the risks.
Many of them argued that the rise in the price of money, in any case, will be gradual and that emerging economies, despite having lower quality debt, continue with robust economic growth.
According to the latest figures available, if we add public and private debt; that is, that of the states, plus banks, plus individual debt and that of corporations, each world inhabitant would have to pay 21,866 euros.
Right now, the total debt bill amounts to $164 billion, the equivalent to 225% of world GDP, a never seen before record of global indebtedness that no one seems to know how to deal with; or even worse, no one in the world of finances or even inside the heavily indebted corporations cares to deal with.