- Nonfinancial corporate debt-to-GDP is high, but debt-to-assets and debt-to-earnings remain moderate
- Solid earnings, tax cuts and low real interest rates allow corporations to service their debt without problems
- However, tighter financial conditions, a slowdown in profit growth and higher risk aversion will lead to higher debt distress levels and deterioration in credit quality
- Higher distress in nonfinancial corporate leverage could lead to a recession, but not singlehandedly cause a systemic financial crisis
The unprecedented period of highly accommodative monetary policy and ample liquidity over the last ten years supported a surge in nonfinancial corporate debt. In 2Q18, it reached a new high of $9.4tn. This represents an increase of $3.3tn or 53% since 1Q10. The ratio of nonfinancial corporate debt to GDP stands at 46.2% - the maximum reached since 1948, when this data started to be recorded in the current form (Figure 1). The high level of debt has raised concerns surrounding the financial health of the business sector, particularly in a period of raising interest rates, which in the past has presaged an increase in debt defaults (Figure 2). Given the current cycle’s excessive risk-taking in credit markets due to higher financing of junk-bonds and leveraged loans, the next wave of defaults could be much worse. This brief investigates the conditions behind the high levels of corporate debt and discusses the possible developments in the upcoming quarters.
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