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TheEconomistMarch 14th 2020 57

1

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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