US corporate debt
James Hawkins
American household debt triggered the global financial crisis in 2008. 1 However, America has looked like a ‘paragon of creditworthiness’ 2 for much of the subsequent recovery. Its corporations have made bounteous profits; its households have rebuilt their balance-sheets; and the U.S. government keeps providing US governments bonds – everyone’s favourite safe asset. Over the past decade, if p eople wanted to look for more unreliable debt, they would have to search somewhere else: to China, where state-owned firms continue to default on their debt as the government tightens credit growth; 3 to Europe, where the European debt crisis halted economic growth and created social turmoil; 4 and to emerging markets, where ‘dollar - denominated debts are a perennial source of vulnerability’ . 5 So is America as reliable as it seems? Since 2012 U.S. corporate debt has grown at an alarming rate. As of April 2022, it stands at $22.5 trillion, 105% of US GDP. 6 Double where it stood at after the financial crisis, it has grown similarly to U.S. household debt in the years leading up to the financial crisis in 2008. 7 In contrast to the US, corporate debt levels in the EU throughout the last decade have remained stable at around $13 trillion, 76% of EU GDP, although they did spike up to $15.8 trillion in 2020 due to the pandemic. 8 The past decade has been a more auspicious time for firms than for households. Firms take on more debt than households in order to grow their businesses in excess of existing cash flow 9 while spending, expanding, and producing is very attractive in a world of low interest rates. Nevertheless, companies are left fragile with heavy loads of debt, causing markets to become skittish. In 2018, fears over the sustainability of hefty debt loads began to show up in financial markets. 10 High-yield bond market turned negative for the second time since 2008. Interestingly, in May 2019, Jerome Powell, chair of the Federal Reserve, said that some corporate debt carried ‘moderate’ risk 11 and that ‘if a downturn were to arrive unexpectedly, some firms would face challenges’ 12 and it could ‘pose a new threat to financial stability,’ 13 similar to the how sub-prime mortgages helped trigger the financial crisis in 2008.
American corporations have easily been able to service their debt over the past decade due to consistently low interest rates and bumper profits. This can be shown in a report conducted by The
1 Bruno, ‘ Financial Crisis Explained ’. 2 The Economist , ‘America’s corporate debt mountain’. 3 Lee, ‘Debt at China’s state -owned firms ’. 4 Kenny, ‘ European Debt Crisis ’. 5 The Economist , ‘America’s corporate debt mountain’. 6 Prodanoff, ‘ US Corporate Debt Statistics ’. 7 Faria-e-Castro and Bharadwaj, ‘ Household debt meets corporate debt ’. 8 Prodanoff, ‘ US Corporate Debt Statistics ’. 9 UPFINA, ‘ Companies excess debt ’. 10 Oh, ‘ Junk bonds in 2018 ’.
11 Crutsinger, ‘” moderate ” risk from corporate deb t’. 12 Powell, ‘ Business debt and our financial system ’. 13 Crutsinger, ‘” moderate ” risk from corporate deb t’.
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