Opinion | Bank collapses are just the start of the worlds financial woes indebted businesses
The debt of global non-financial companies was US$88 trillion at the end of 2021 when it exceeded the value of global gross domestic product for the first time. It eased slightly in 2022 but since then things have taken a turn for the worse where dealing with the burden of debt is concerned.
This is because interest rates have surged over the past year from the near zero (and sometimes even negative) levels they were reduced to in the wake of the 2008 global financial crisis by central banks desperate to stave off a repeat of the Great Depression.
As the IMF noted in 2021, “Easy financial conditions in the aftermath of the Global Financial Crisis of 2008-09 have been a key driver of the rise in leverage in both advanced and emerging market economies.”
Since March last year, the US Federal Reserve has been raising its benchmark overnight borrowing rate, which now stands at between 4.75 and 5 per cent. Many central banks in both advanced and emerging economies where actions are effectively dictated by Fed policy have followed suit by also raising rates.As veteran financial analyst Jesper Koll put it during a recent event that I moderated at the Foreign Correspondents Club of Japan in Tokyo, “Bad things happen when interest rates rise.” They do indeed.
Debt service costs rise – for households, corporate borrowers and governments. Mortgage payers can then lose their homes and businesses – small and medium-sized enterprises especially – face the risk of going bankrupt.
How is it that corporate executives and market analysts apparently fail to foresee the entirely predictable consequences of such developments? It often seems to be because they haven’t been around long enough to compare present events with past experience. They can’t see what’s coming.
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Thousands of jobs at risk after UBS’ US$3.2 billion takeover of Credit Suisse
Thousands of jobs at risk after UBS’ US$3.2 billion takeover of Credit Suisse
Typical of this viewing of life through rose-tinted glasses, Nigel Green, head of asset manager deVere, observed that investors are increasingly convinced that looser monetary policies are on the way and, as a result, “want to build up their investment portfolios with new money”.
If this is true – and it probably is given the recent record of poor investor judgment – it only goes to show just how little understood are the consequences of central banks and politicians’ collective refusal to bear pain in the present to secure future financial health.
This determination to “buy off” the purgative or salutary consequences of each financial crisis has been a hallmark of official policy for several decades now. Following the collapse of the dot-com stock bubble in 2000, then Fed chairman Alan Greenspan leaned into monetary policy easing.Subsequent financial system excesses led to the global financial crisis in 2008, followed by more monetary easing. Financial system collapse and global recession were averted but the weapon of choice to achieve this – a decade of historically low interest rates – created huge asset price inflation.
That it didn’t also cause runaway consumer price inflation was due to banks choosing to keep “easy money” in their current accounts with central banks rather than lend it out.
However, the inflation picture changed when governments launched massive cash payouts during the Covid-19 pandemic. The following surge in prices panicked central banks into sudden and sharp rate hikes, followed (predictably) by economic slowdown, collapse in fixed-income asset prices, a new banking crisis and speculation that central banks would need to pause rate hikes even before the dragon of inflation is slain.The “fun” is not over yet. The other shoe – corporate sector debt distress and maybe a mortgage payment crisis – has yet to drop. Just where all this will end is hard to predict. Perhaps only when legions of “zombie” companies that have been kept on life support by constant infusions of central bank liquidity begin to march, and when the ranks of the unemployed begin to swell, will the proverbial penny drop.But the great powers may be too busy confronting each other with trade and tech wars, and even with threatened conflagrations, to notice until a super-recession sets in. The financial system may have to purge itself before policymakers really take seriously the threats that the system faces.Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs
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