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TheEconomistMarch 14th 2020 57

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O


ver the past decade officials—and
some bankers—have tried to redesign
the financial system so that it acts as a buff-
er that absorbs economic shocks rather
than as an amplifier that makes things
worse. It faces a stern test from the covid-19
virus and the economic ruptures it has trig-
gered, not least a Saudi-led oil-price war
(see next article). The locus of concern is in
the world’s ocean of corporate debt, worth
$74trn. On Wall Street the credit spreads of
risky bonds have blown out, while in Italy,
a bank-dominated economy that is already
in lockdown, the share prices of the two
biggest lenders, Intesa Sanpaolo and Un-
iCredit, have dropped in the past month by
28% and 40% respectively.
The scare has four elements: a queasy
long-term rise in borrowing; a looming
cash crunch at firms as offices and fac-
tories are shut and quarantines imposed;
the gumming-up of some credit markets;
and doubts about the resilience of banks
and debt funds that would bear any losses.
Take the borrowing first. Companies

came out of the 2007-09 financial crisis in a
relatively sober mood, but since then have
let rip. Global corporate debt (excluding fi-
nancial firms) has risen from 84% of gdp in
2009 to 92% in 2019, reckons the Institute
of International Finance. The ratio has ris-
en in 33 of the 52 countries it tracks. In
America non-financial corporate debt has
climbed to 47% of gdp from 43% a decade
ago, according to the Federal Reserve.

Underwriting standards have slipped.
Two-thirds of non-financial corporate
bonds in America are rated “junk” or “bbb”,
the category just above junk. Outside
America the figure is 39%. Firms that you
might think have rock-solid balance-
sheets—at&t—have seen their ratings slip,
while others have been saddled with debts
from buyouts. Naughty habits have crept
in: for example, using flattering measures
of profit to calculate firms’ leverage.
All this leaves business more vulnerable
to the second factor, the shock from co-
vid-19 and the oil-price slump. Some 7% of
non-financial corporate bonds globally are
owed by industries being walloped by the
virus, such as airlines and hotels. With oil
close to $35, America’s debt-addicted frack-
ers and other oil firms are in trouble. Ener-
gy is 8% of the bond market.

The cash question

In a sea of debt


Corporate bonds and loans are at the centre of a new financial scare

On borrowed time

Total outstanding: $20.9trn

World, non-financial corporate bonds outstanding , % of total
March 10th 2020

Source:Bloomberg *Travelandhotels,transport,restaurants,departmentstores, casinos, airlines

Byrating

9080706050403020100 100
AboveBBB BBB Junk Not available

By sector Oil Other

Virus-sensitive*

By incorporation United States China Europe Other

Finance & economics


58 Theoil-pricewar
59 Italy’svirusresponse
59 Enteringa bearmarket
60 A half-bakedIndianbankrescue
61 Buttonwood:Involuntarycode
62 Free exchange: The ravages of time

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