S&P warns on corporate and consumer debt burden
S&P Global Ratings has warned that the world is facing a historic debt burden which could lead to a rise in defaults on corporate and consumer loans.
In a new report, the ratings agency said that global debt-to-GDP is at a historic high of 349 per cent – more than 25 per cent higher than it was in the pre-2008 financial crisis era.
This suggests that productivity from debt has declined, S&P said. As a result, it will be hard to avoid write downs and defaults, the company warned.
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Terry Chan, senior research fellow at S&P Global Ratings, said that the net debt leverage of non-financial corporates are up by almost one-third, to 98 per cent.
Among corporate borrowers, Chan said that rising leverage in the past decade has been primarily driven by China’s growth. However, a recent S&P stress rest of 20,000 corporates found that higher inflation and higher interest spreads will cause potential defaulters to more than double to 17 per cent by 2023 – up from seven per cent in 2021.
“With Chinese corporate debt accounting for nearly one-third of global corporate debt, this poses a contagion risk to the world,” Chan added.
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Household debt has also been affected, with S&P predicting that households may have to spend a bigger share of their disposable income on servicing debt. However, analysts expect global household debt leverage to remain “relatively stable in the next two years” despite rising interest rates.
“We don’t expect household delinquencies to rise dramatically in 2023, but under a scenario with more severe stress–a full-blown recession with a sharp rise in unemployment–we would see delinquencies start to rise,” added Chan.
Financial institutions’ debt leverage is currently at similar levels to pre-2008, as banks’ strong liquidity positions have tempered their market needs, while rising rates have boosted net interest income.
“There is no easy way to keep global leverage down,” said Chan. “Policymakers and societies’ acceptance of curbed spending and more debt write-downs are among the many difficult trade-offs.”
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