The United States Is Facing A Mountain Of Corporate Debt

While the U.S. economy appears to be booming, so is the country’s corporate debt, which is a historical and stratospheric high. Easy borrowing – or easy paper money, if you will – has allowed companies to ignore their mounting debts in favor of borrowing more. As of the end of the second quarter 2019, non-financial corporate debt was at $5.7 trillion.

This could easily lead to a corporate slowdown or even recession. Investors are beginning to notice and demand that companies pay down their debts and lower dividend payments instead of adding to it. According to a Bank of America survey, 46 percent of fund managers believe that corporations are overextended with debts. In the same Bank of America survey, more than half of those responding expect the economy to weaken. Some believe that the chances of a recession in the next year is at about 30 percent. Eighty percent of corporate financial officers think that the U.S. will be facing a recession within two years. In the event of an economic slowdown, this tsunami of debt would be even more difficult to pay off. Some companies are taking the situation seriously. Since the recent tax cuts, 37 percent of corporations have diverted their efforts to pay off debts. Prior to the tax cut, only 5 percent were making any visible effort at debt-repayment.

While corporations are struggling to pay off their debt, the recent interest rate hikes have made borrowing more difficult. There have been nine interest rate increases over the past decade, and the Federal Reserves’ own balance sheet has decreased by $400 million during that period. The non-financial corporate debt ratio to GDP is the most alarming since the Great Depression.  One-third of companies are either not rated or rated as junk.

One major concern are bank loans to risky customers, those who are the least likely to be able to repay their loans. More than $1 trillion risky loans are on the books. What happens in the event of a default?

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