NEW YORK — Surging U.S. business debt, already at historic levels, is posing a potentially huge risk for the global financial system and the world economy, raising concerns among market players and policymakers.
Experts are growing increasingly uneasy about both the quality and quantity of debt in the U.S. corporate sector as the amount of loans to borrowers with lower credit ratings and already high levels of debt is increasing.
A newly created index shows corporate debt levels are now even higher than before the dot-com bubble or the global financial crisis triggered by the 2008 collapse of U.S. investment bank Lehman Brothers.
Some experts warn that the ticking debt bomb in the U.S. corporate sector could eventually explode, triggering a new global financial meltdown.
In a speech delivered on May 20, Federal Reserve Chairman Jerome Powell sounded the alarm about rising levels of business debt, although he dismissed comparisons between the current situation and the conditions in U.S. mortgage markets before the financial crisis.
Views about the risks from rising corporate borrowing “range from ‘This is a return to the subprime-mortgage crisis’ to ‘Nothing to worry about here,'” Powell said. “At the moment, the truth is likely somewhere in the middle.”
One important concept for understanding the implications of corporate America’s borrowing binge for the financial system and the world economy is the credit cycle — the cyclical expansion and contraction of access to credit over time.
Many policymakers and market players are beginning to fear that the U.S. corporate credit cycle is approaching its peak and will soon enter a phase of contraction.
The International Monetary Fund has created a new index to visualize the credit cycle by integrating 18 relevant indicators, including those of corporate financing and investor behavior. Based on data for the years since 1980, the index gives a value of 1 to the highest point of the cycle and 0 to the lowest.
A chart of the index clearly points to very high levels of corporate borrowing, even higher than the peak points during the tech bubble and the housing bubble. “The US corporate credit cycle appears to be at its highest point in recent history,” the IMF said in its “Global Financial Stability Report,” released in April. The indicators show corporate debt is skewed toward lower-rated issuers, with leverage being close to cycle highs.