IMF Issues Warning on Corporate Debt
Any downturn in the global economy is likely to be made worse by high levels of corporate debt. According to the IMF over three quarters of the corporate world have high debt levels classified as debt above 70% of GDP.
An inability to service debt due to a trimming of profits or cash flow restrictions could set the path to default for highly indebted companies when the current credit cycle matures. Many commentators believe we are entering the final phase of this cycle soon and the recently inverted US treasury curve would add more weight to this argument.
The EU was a target for the IMF global financial stability report which exposed risks for sovereign nations with high debt with Italy taking the burnt of the warnings receiving an accolade for the source of greatest risk.
Equity markets had taken a hit towards the end of last year reducing profitability, but corporations have had a continued appetite for debt. The tightened environment was a good test to the financial systems and recent central bank stimulus is alleviating short term risks even with limited take up by the large commercial institutions. With high levels of debt continuing the IMF points out that the economy in the medium term is still at “historically high-risk levels”.