A $10 Trillion Corporate Debt Bomb Is Waiting to Explode the U.S. Economy

In the last few months, this mountain of corporate debt has been compounded by a once-in-a-century event.

By Brendan Cole and cross-posted from Newsweek.

Even before the pandemic reached its height, the IMF was warning in January that the world’s largest economies like the U.S. were unprepared for a slowdown.

Fast forward half a year, with millions of lost jobs and thousands of businesses gone bankrupt in the U.S. because of the novel coronavirus, the word slowdown is inadequate to describe the scale and speed of the economic collapse.

And the pandemic could yet throw another grenade at the economy: A massive corporate debt explosion.

The American economy has lived on debt for a long time. The ratio of the total debt of the government, businesses, and consumers relative to GDP has more than doubled since the 1980s. Record-low interest rates following the 2008 financial crisis further swelled the debt significantly.

U.S. companies owe more than $10 trillion, which is nearly half of the country’s 2019 GDP of $21.5 trillion. Taking other forms of business debt into consideration, including partnerships and small businesses, that figure stands at an eye-watering $17 trillion, the Financial Times reported earlier this month.

“This increase in debt has contributed to increased economic volatility, and has left the country in a weakened position to deal with shocks such as the current virus,” Robert Goldberg, associate professor of finance and economics at Adelphi University in New York, told Newsweek.

In the last few months, this mountain of corporate debt has been compounded by a once-in-a-century event.

Following the lockdown of state and local economies in March, the corporate debt market froze and there was a slump in the issuance of new bonds, in particular for non-investment grade debt.

To get bonds flowing again, the Federal Reserve announced a program to support the corporate debt market, which improved liquidity.

The Fed’s move to buy $750 billion in corporate debt, and the Main Street lending program making $600 billion in loans to small and mid-sized companies, helped indebted firms avoid bankruptcy. But it also added to the debt pile.

Aimed mostly at the investment-grade debt market, the issuance of non-investment grade debt “has skyrocketed” in the last few months, said David Gulley, professor of economics at Bentley University, Massachusetts.

“Long term, however, it’s not clear whether the now highly indebted companies will be able to survive, especially in industries like travel and leisure,” he told Newsweek

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