IMF sounds alarm over £7trillion Covid borrowing binge: Rising corporate debt sparks fears of a fresh banking crisis
Borrowing binge: The International Monetary Fund has said rising levels of bad debt, and a decreased appetite from banks to lend, could cause a ‘legacy of vulnerabilities’
Companies took on an extra £7trillion of debt last year in a corporate borrowing binge that has prompted fears of a fresh banking crisis.
Firms turned to loans to see them through the pandemic as they had to shut their doors and the global economy slumped.
Now the International Monetary Fund (IMF) has said rising levels of bad debt, and a decreased appetite from banks to lend, could cause a ‘legacy of vulnerabilities’.
In the UK, firms have borrowed over £75billion under Government-backed loan schemes since the pandemic began.
According to the Institute of International Finance, companies around the world borrowed around £7trillion last year, taking total corporate debt to £107trillion. Covid has punched holes in the finances of many small firms and in larger businesses in hard-hit sectors such as hospitality and travel, the IMF noted.
Many companies are still on the brink of collapse, and could cause huge losses for banks if they fail to repay loans.
Last year, the UK’s major banks booked tens of billions of pounds in expected bad loans as they predicted pandemic struggles.
In most countries, these losses shouldn’t pose a direct risk to banks, the IMF said, since lenders built up larger cash buffers following the financial crisis to protect them from such risks.
But the IMF said there was the risk that banks could pull back on vital lending when Government support is withdrawn.
In its Global Financial Stability Report, the IMF said: ‘The phasing out of support policies could have a significant impact on some banks, likely weighing on their appetite for lending.
‘Moreover, for most banks, uncertainties about credit losses and weak prospects for profitability are likely to discourage significant reduction in capital buffers to support the recovery.’
The IMF has suggested that businesses should be assessed on the likelihood they will be able to continue after the pandemic.
Those with a future should continue to receive more targeted support, it said, while others should be wound up quickly.
It is also concerned that high levels of debt could weigh on future economic activity, as companies focus more on repaying the loans than expanding and investing.
In the UK, the Government has made it easier for struggling companies to access cash by providing guarantees to banks who lend out money under state-backed programmes.
The IMF said countries should try to keep targeted support in place for firms which need it, while helping businesses which have already taken on eye-watering debt to pay it off.
Pandemic slump to leave ‘smaller scars’ than 2008 financial crisis
IMF chief economist Gita Gopinath (pictured) said unprecedented action by governments and banks will limit the ‘scars’ Civid leaves in advanced economies
The Covid-19 recession will do less long-term damage than the 2008 crisis, says the International Monetary Fund (IMF).
As it raised its forecasts for growth worldwide, the watchdog said unprecedented action by governments and banks will limit the ‘scars’ in advanced economies. But differences in the pace of jab rollout mean the recovery was uneven.
‘The rising human toll worldwide and the millions of people that remain unemployed are grim markers of the extreme social and economic strain that the global community still confronts,’ said IMF chief economist Gita Gopinath (pictured).
The fund expects the global economy to grow 6 per cent this year and 4.4 per centnext year, after a contraction of 3.3 per cent last year.
‘The contraction was unprecedented,’ said Gopinath. ‘IMF staff estimates suggest it could have been three times as large if not for extraordinary policy support.’
She added: ‘Thanks to unprecedented policy response, the recession is likely to leave smaller scars than the 2008 global financial crisis.’