Low borrowing rates put in place amid a slowing economy – partly caused by uncertainty created by the US-China trade war – have sparked a surge in risky corporate borrowing which could sow the seeds of a new global crisis, the International Monetary Fund warned on Wednesday.
The IMF flagged the rise of riskier debt and called on government regulators to widen the perimeter of oversight beyond banks, which were the source of concern during the 2008 global financial crisis.
In an economic slowdown only half as severe as the last crisis, a stunning $19 trillion in debt held by companies in eight major economies could be at serious risk, the IMF warned in its latest Global Financial Stability Report.
Worsening trade tensions can undermine the situation further as new developments move financial markets worldwide and investors become “more pessimistic,” said Tobias Adrian, head of the IMF department that produced the report.
Deteriorating trade tensions exacerbate financial vulnerabilities which serve as “amplification mechanisms for bad news,” Adrian told reporters.
“So we urge policymakers around the world to continue to work together in order to resolve those trade tensions, as that is a significant source of uncertainty and a significant source of creation of downside risk,” he said.
With the global economy slowing, central banks around the world have lowered interest rates to help shore up growth, which has made borrowing easier for companies and governments alike.
But is also drives investors to find ways to get a better return on their investment, including by taking on riskier securities.
If a new crisis were to erupt, many of those borrowers would not be able to cover their debt with earnings, Adrian said.
The $19 trillion in “corporate debt at risk” amounts to almost 40 percent of total corporate debt in the eight economies studied, which include the United States, Japan, China, Britain, France and Germany.
While the banking system is safer today due to the reforms adopted following the 2008 financial crisis, pension funds and insurance companies are taking on more risk, he said.
Anna Ilyina, division chief in the IMF’s Monetary and Capital Markets Department, warned that total corporate debt in the eight major economies now stands at about $51 trillion, compared just $34 trillion in 2009.
Government regulators need to develop “more stringent supervision,” especially of corporate borrowing, she said.