Global Debt Leverage: Risks Rise, But Short-Term Crisis Unlikely
We are waiting the global debt-to-GDP ratio will increase from 14% to 265% by the end of the year before easing off as the world slowly recovers to pre-coronavirus income levels. Higher leverage, coupled with a more challenging operating environment, has led us to downgrade 22% of corporate and sovereign issuers globally, particularly speculative grade borrowers and those most affected by the economic effects of COVID19.
Insolvency risk is likely to increase for some corporate borrowers if cash flow and earnings do not return to pre-pandemic trends before the extraordinary fiscal and monetary stimulus is withdrawn. Indeed, default rates could double by mid-2021. Leverage growth could stabilize in the coming years as companies rethink income and investment opportunities, governments rebuild their balance sheets and households become more conservative.
However, we believe that a short-term debt crisis is unlikely. This is based on our basic assumption of a continued, albeit turbulent, global economic recovery. The recovery, in turn, hinges on the wide availability of a COVID-19 vaccine by mid-2021, the maintenance of accommodating financing conditions, and adjustments in spending and borrowing behaviors by businesses, governments. and households (see graph 1). Given the commitments of governments and pharmaceutical manufacturers, we assume that a coronavirus vaccine will be widely available next year.
Unprecedented fiscal stimulus from governments around the world, combined with equally massive monetary stimulus from the central bank, have kept the liquidity tap open to businesses through bond markets and bank loans . We expect benchmark interest rates to stay low until 2023. In the United States, the Federal Reserve has said it could allow inflation to exceed its previous target of 2% while keeping the federal funds rate low to stimulate job growth. At the same time, credit spreads have tightened from March highs and are, for now, more sensitive to specific business risks than to market risks, but with residual sensitivity for investment grade borrowers. lower.
A substantial part of the world’s debt is financed by the banks. We are waiting most major banks are expected to be able to absorb credit losses occurring in those two years, taking into account basic income. Banks are largely expected to be able to continue lending and resume normal business by 2023. Regulators ‘responses to the economic shock have strengthened banks’ ability and willingness to lend and support customers. The withdrawal of fiscal measures could reveal new weaknesses in asset quality, and borrower tolerance could mask the deterioration in asset quality. For banks around the world, we forecast credit losses of around $ 2.1 trillion for 2020-21, of which the $ 1.3 trillion this year is more than double the 2019 level.
the The increase in the ratio of household debt to GDP in 2020 is partly due to the decline in GDP. Households often take on more debt early on as they face a loss of income. Looking at their behavior during past downturns, we expect households to become cautious and slow debt growth down the road. After some gradual improvements in 2021, we expect the overall household debt to GDP ratio to end in 2023 at 66%, the same as our projection for the end of 2020.
Our baseline scenario carries significant risks. These include economic shocks slowing the return to pre-pandemic income levels, accelerated infection rates or poor vaccine distribution, rising interest rates and a dramatic and sustained widening of credit spreads. , continued debt growth and consumer demand rebounding less than expected due to structural changes.
the the short-term outlook remains stressful, especially for borrowers at the lower end of the credit ladder or in sectors most exposed to social distancing measures and the economic downturn. Indeed, our reference is for the The 12-month speculative-grade corporate default rate is expected to double in the United States to 12.5% by June 2021 (from a preliminary of 6.3% in September 2020) and to 8.5% in Europe (from 4.3%). Globally, the 12-month speculative-grade corporate default rate reached 4.9% in September 2020.
Here it should be noted that looking at the absolute level of debt offers an incomplete view, especially since borrowing costs are very low and appear likely to remain so for an extended period. The fact that a debt is too heavy depends as much on the borrower’s ability to repay this debt as on its absolute amount. It is also important to recognize the feedback loop involved, since the The increase in debt helps stimulate the same economic recovery that is crucial to the ability of borrowers to repay their debts. This is especially true for sovereign countries, whose fiscal stimulus measures (while significantly increasing their debt burden) have helped make economic downturns in their countries or regions much less deep than they could have been. to be otherwise.