Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

Corporate Debt Could Make Next Recession “Difficult to Manage”

  by    0   0

Bankers, investors and executives are increasingly worried about corporate debt,  according to a Reuters report.

Specifically, the concerns center around “leveraged lending.” These are loans made to firms already deeply in debt. Think subprime loans for corporations. As the Reuters report put it, “the concern is that the loans would be difficult to either collect or resell in a downturn, putting both the borrower and lender at risk.”

With the second-longest US expansion in its advanced stages, the worry is that a key part of the credit market could be particularly vulnerable to a slowdown, as highly-indebted companies face a greater risk of default.”

According to the S&P/LSTA Leveraged Loan Index, the total leveraged loan market has doubled since 2008 and has grown by about 17% this year alone. Currently, there are some $1.12 trillion in outstanding leveraged loans.

A record 59% of these loan rate B+ or worse, according to S&P Global.  According to the credit rating agency, “Risks attributable from this debt binge are significant.”

The concern is the high level of corporate debt could make the next economic downturn difficult to manage. While few think it could cause the same kind of cascading meltdown we saw with the subprime mortgage market in ’08, it does “risk handcuffing companies and lenders trying to react to a downturn, possibly making it more painful.”

In a worst-case scenario that would faintly echo the financial crisis a decade ago, the defaults could worsen any downturn by destabilizing big non-bank lenders, such as private equity firms and hedge funds, and hitting employment across US industries. Leveraged loans are typically made to already indebted firms with low credit ratings, and the concern is that the loans would be difficult to either collect or resell in a downturn, putting both the borrower and lender at risk.”

One Fed official likened the risk to the popping of the tech bubble at the turn of the century.

Guggenheim Partners managing partner Scott Minerd told officials at the New York Federal Reserve Bank he didn’t think they would be able to avoid a “messy recession” in light of the credit buildup.

Because it is now so extreme, any attempt to rein in credit expansion is going to ultimately blow up.”

Now, some movers and shakers in the financial sector want the Fed to “do something” about all of this leveraged lending. In the first place, it’s unclear what exactly the central bank can do. In the second place, the Federal Reserve is a big part of the problem in the first place. Even the Reuters article acknowledged this.

The central bank itself may have contributed to the ballooning $1.12-trillion US leveraged loan market by holding interest rates near zero for seven years in the wake of the recession to encourage lending and investment.”

Well, duh.

The Fed’s monetary policy fueled a massive credit expansion and blew up all kinds of bubbles. With the Fed now trying to “normalize” interest rates, the bubbles are starting to pop. We’ve already seen signs of trouble in the housing market and auto industry, two sectors particularly sensitive to interest rates. Rising interest rates are not good for an economy built on piles of debt. And corporate debt is just one of many trouble-spots in the US economy. We also have massive amounts of government debt and consumer debt in the US.

The stock market is starting to reflect these problems as well. As Peter Schiff put it in a recent appearance on RT Boom Bust, this is not just a healthy correction.

This is a bubble deflating. This is exactly how it started in 2008, only this is a bigger bubble and it’s going to produce a bigger crisis.”

Despite the pleading from investors, bankers and lenders, the Fed isn’t going to “fix” this problem. As Peter summed up succinctly in the RT interview, the Fed is the source of the problem. We basically have a repeat of the years leading up to 2008.

They kept interest rates at 1%, which at that time was the lowest they’d ever been. They left them there for an entire year, and then it took two or three years to normalize back to 5%. But we took on a lot of debt when interest rates were artificially low. A lot of it was mortgage debt. And the bubble popped. But this time, the Federal Reserve injected far more monetary heroin into the economy. They kept interest rates at zero for six years. They’ve been raising them for three years, and they’re just now back at 2%. So, you have nine years so far of extremely artificially low interest rates, which have caused a much bigger credit bubble than the one that popped in 2008.”

Gold IRA Rollover to 401k

Get Peter Schiff’s most important Gold headlines once per week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!


Related Posts

The Fed Is Backstopping the Enormous Government Debt

The 2020 budget deficit surged passed $3 trillion in August even as the US government continues to borrow and spend at a torrid pace. Since March, the federal government has added $3.3 trillion to the national debt. That is on top of the $1.4 trillion in debt Uncle Sam piled on in the 12 months […]

READ MORE →

The Fed Delivers What’s Expected

If you go to McDonald’s, you expect to get a hamburger. If you go to KFC, you expect to get chicken. And if you go to the Federal Reserve, you expect to get easy money. The Fed delivered exactly what you would expect at this month’s Federal Open Market Committee meeting that wrapped up Wednesday.

READ MORE →

Lockdowns May Have Permanently Scarred the Labor Market

Every week, analysts and pundits pour over the latest weekly jobs report looking for signs of life. Every month, we dive into the monthly unemployment numbers hoping they signal economic recovery. But these unemployment numbers don’t tell the whole story. The government economic shutdowns in response to the coronavirus pandemic have deeply wounded the economy […]

READ MORE →

China Signals It May Dump More US Debt

The Chinese are threatening to dump US Treasuries even as the federal government borrows money at a torrid rate. If the Chinese were to follow through, it could wreak havoc on the bond market and send interest rates surging despite the Federal Reserve’s best efforts to hold them down.

READ MORE →

Federal Deficit Blows Past $3 Trillion

The federal government added another $200 billion-plus to the budget deficit in August, pushing the fiscal 2020 budget shortfall to over $3 trillion with one month still left in the fiscal year. Uncle Sam continues to rack up enormous monthly budget deficits. The August shortfall came in at $200.1 billion, according to the Treasury Department’s […]

READ MORE →

Comments are closed.

Call Now