At Project Syndicate management consultant Susan Lund warns about a looming risk. Right along with the rise in government debt in the wake of the financial crisis of a decade ago, corporate debt has risen, too:
Over the past decade, the corporate-bond market has surged as banks have restructured and repaired their balance sheets. Since 2007, the value of corporate bonds outstanding from nonfinancial companies has nearly tripled – to $11.7 trillion – and their share of global GDP has doubled. Traditionally, the corporate-bond market was centered in the United States, but now companies from around the world have joined in.
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Still, the biggest risks appear to be in emerging markets such as China, India, and Brazil. Already, 25-30% of bonds in these markets have been issued by companies at a higher risk of default (defined as having an interest-coverage ratio of less than 1.5). And that share could increase to 40% if interest rates were to rise by 200 basis points.
Within these emerging markets, some sectors are more vulnerable than others. In China, one-third of bonds issued by industrial companies, and 28% of those issued by real-estate companies, are at a higher risk of default. Corporate defaults are already creeping upward in China; and in Brazil, one-quarter of all corporate bonds at a higher risk of default are in the industrial sector.
It used to be said that when the U. S. economy sneezed, the rest of the world got a cold. As China, Brazil, and India have grown, the risk presented by excessive debt has spread. Not only is it not just in the United States, it may not be mainly in the United States.
Given their record I don’t think the Chinese are much concerned about private debt. They may well shift much of it into liabilities of the state and forget about it.
I suspect that a couple of additional trillion in export subsidies would be enough to tip the scales against the Chinese on the part of the G7.