$74 trillion center of a new financial scare
Corporate bonds and loans are at the center of a new financial scare. The pool of corporate lending has now risen to $74 trillion.
The scare has four elements:
a queasy long-term rise in borrowing;
a looming cash crunch at firms as offices and factories 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.
To get a sense of the potential damage The Economist has done a crude “cash-crunch stress-test” of 3,000-odd listed non-financial firms outside China. It assumes sales slump by two-thirds and that they continue to pay running costs, such as interest and wages. Within three months 13% of firms, accounting for 16% of total debt, exhaust their cash at hand. They would be forced to borrow, retrench or default on some of their combined $2 trillion of debt. If the freeze extended to six months, almost a quarter of all firms would run out of cash at hand. Global business may need a giant “bridging loan” to get through a tough few months.
The world’s financial system has not become a source of contagion in its own right; Yet!
Garrett Roche CFA, FRM is a global multi-asset/macro investment strategist