The global economy faces escalating risks from rising levels of corporate debt, with companies around the world needing to repay or refinance as much as $4tn (£3.1tn) over the next three years, according to the OECD.
Sounding the alarm over the scale of the debt mountain built up over the past decade since the last financial crisis, the Paris-based Organisation for Economic Co-operation and Development found that global company borrowing has ballooned to reach $13tn by the end of last year – more than double the level before the 2008 crash.
Nearly the equivalent of the entire US Federal Reserve balance sheet – roughly $4tn – will need to be repaid or refinanced over the coming years, the report said. However, the task is complicated by cooling economic growth from trade tensions and a slower rate of expansion in China, potentially hindering the ability of firms to generate the income to repay the loans.
Financial market investors have grown increasingly concerned that high debt levels in the US could turn a looming slowdown for the world’s largest economy into a full-blown recession. High debt levels in several other nations as the Federal Reserve raises interest rates has also rattled financial markets in recent months.
According to research from the Economist Intelligence Unit, a potential meltdown in the US bond market is the second biggest risk to the world economy after the US-China trade standoff, amid a combination of global economic headwinds “more wide-ranging and complex than at any point since the great recession”. The International Monetary Fund has previously warned of gathering “storm clouds” for the world economy, including from trade tensions and heightened levels of debt – particularly in China.
Corporate borrowing levels have rapidly accelerated over the past decade amid rock-bottom interest rates from major central banks, after they cut borrowing costs in the wake of the 2008 financial crisis in order to avert the last recession turning into another great depression.
Central banks have, however, begun to raise interest rates once more, raising the risk that some companies could run into difficulty keeping up with repayments.
Compared with annual average borrowing in the corporate bond markets worth $864bn during the years leading up the crisis, the OECD said that between 2008 and 2018 the global average skyrocketed to $1.7tn per year.
Chinese company debt in particular has rapidly accelerated, raising alarm bells as the level of corporate borrowing soared to reach $2.8tn by the end of 2018, up by as much as 395% compared to a decade ago.
The OECD warned that the share of the lowest-quality bonds – sold by less financially resilient companies to bond market investors – stood at 54%, a historical high. Central bankers have also become increasingly worried over the rapid growth in US leveraged loans – lending to already highly indebted companies – in recent months.
“In the case of a downturn, highly leveraged companies would face difficulties in servicing their debt, which in turn, through lower investment and higher default rates, could amplify the effects of a downturn,” the OECD report said.
The Economist Intelligence Unit said there was a “moderate risk” that the US debt burden would turn the next economic downturn into a recession. “In this scenario, a US recession would exacerbate a global slowdown, with countries affected by declining US demand for goods and investment.”
There are, however, hopes that the current debt pile can be managed safely. The Fed has adopted a more cautious stance in recent months as concerns intensify over the health of the global economy. The Fed had increased rates to a range between 2.25% and 2.5% as recently as December, in the ninth such move since late 2015.
Paul Watters, the European head of corporate research at the ratings agency S&P Global Ratings, said the odds of a US recession over the next 12 months were 20-25%.
“Our concern is that the authorities’ room for manoeuvre and willingness to cooperate is diminished compared to a decade ago. Policy headroom is limited, given the scale of quantitative easing and the still low level of interest rates by historical standards,” he said.