Expansion, diversification, growth: Everything costs. After the global financial crisis of 2007-2009, a universal imperative emerged: get out of debt. The opposite happened. Central banks around the world have cut interest rates to historic lows to stimulate the economy, and companies that have been borrowing to stay afloat for years, refinancing debt or buying back stocks have done it again.
How much did they borrow?According to data by the Institute of International Finance (IIF) and S&P Global, the debt of non-financial corporations has increased from 75% of total global gross domestic product (GDP) in 2007 to 98% last year (which along with the debt of governments, households and financial corporation brings the total aggregate worldwide debt to a record $300 trillion, a 349% leverage on the gross domestic product).
Not only has corporate debt grown, the quality of that debt has gotten dramatically worse. From the recovery period beginning in 2010 until today, S&P estimates that the share of investment-grade bonds fell to about 76% from over 90% during the previous two post-financial crises. Junk bonds offer a higher return, but have a higher risk of default. The issuer might not be able to pay interest and principal in a timely manner, or ever.By some estimates, at the current pace, speculative-grade non-financial global debt could soon surpass investment grade—the implication being that as we try to fix the current crises we might be creating conditions for crises down the road. Furthermore, as risky credit market segments such as high-yield bonds and leveraged loans have expanded, borrowers’ credit quality, underwriting standards and investor protections have weakened.
As all this was taking place, economists were sounding the alarm louder and louder: the debt buildup and the resulting higher interest charges can become an overwhelming burden for companies (as well as governments and households), making them vulnerable to tighter monetary policies and pushing them—and everyone with them—closer to economic collapse.
A new machine-learning model developed by the IMF—based on 50 indicators going back to 1995—estimates that out of 55 advanced and emerging economies that 38 are currently at medium risk and seven are at high risk of corporate distress spilling over into systemic economic risk. Not only are more countries at high risk of a debt crisis than before the pandemic, but the number of large economies in this category has also grown: it now accounts for 21% of world GDP in the third quarter of 2022, up from just 1% at the end of 2019.
Rising global inflation, exacerbated by Russia’s war in Ukraine, has made the situation worse. According to S&P Global Ratings, the pace of rate hikes around the world in 2022 was faster than at any time in the last four decades. To curb inflation, central banks raised interest rates to curb lending and spending, and companies issued billions of dollars worth of bonds and notes when interest rates were low (including a record number with the lowest rating) , are now struggling to provide this service. and refinance your debt.