Explosion in company borrowing has created a corporate debt timebomb which could crash the global economy, the IMF warns
A corporate debt time bomb could crash the global economy following an explosion of company borrowing, says the International Monetary Fund.
After a decade of super-low interest rates, the watchdog says as much as $19trillion (£14.8trillion) of debt is owed by companies that do not earn enough to cover the interest payments on their borrowings.
The IMF is urging governments to defuse the debt time bomb before it is too late.
Timebomb: The IMF’s stability overlord Tobias Adrian has warned that debt owed by firms unable to cover interest expenses with earnings could rise to $19 trillion
Among its ideas is an end to tax relief on interest bills of companies, which would end bias in favour of debt.
‘Our conclusion is sobering,’ the IMF’s stability overlord Tobias Adrian said.
‘Debt owed by firms unable to cover interest expenses with earnings could rise to $19 trillion, almost 40 per cent of corporate debt in the economies we studied, which include the US, China, and some European economies.’
Among concerns is that the potentially toxic debt is spread around the financial system in much the same way as sub-prime mortgages were in the run-up to the financial crisis.
Banks and intermediaries have packed up this debt and turned some of it into securities held in pension funds, insurance firms and other non-banks.
The blame for the debt build-up is placed on the prolonged period of low interest rates as central banks supported economies in the aftermath of the crisis of a decade ago.
Instead of the normalisation of interest rates expected over time, the central banks recently embarked on another round of money-printing to offset the tensions caused in part by US-China trade dispute.
The IMF warnings must be seen in the context of its failure to forecast the bank crisis that triggered the Great Recession.
It does not want to be caught on the hop again. Much of the risk has been passed from the banks, to non-bank institutions, such as insurance companies.