[rad-green] Here's what could really sink the global economy: $19 trillion in risky corporate debt -- CNN Business
"Sid Shniad" (via rad-green Mailing List) <[email protected]> Mon, 16 Mar 2020 18:50:20 -0700
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This is a multi-part message in MIME format... ------------=_1584409847-7785-133691 Content-Type: multipart/alternative; boundary="00000000000034241f05a103293d" --00000000000034241f05a103293d Content-Type: text/plain; charset="UTF-8" Content-Transfer-Encoding: quoted-printable *https://www.cnn.com/2020/03/14/investing/corporate-debt-coronavirus/index.= html <https://www.cnn.com/2020/03/14/investing/corporate-debt-coronavirus/index.= html>* *CNN Business March 14, 2020Here's what could really sink the global economy: $19 trillion in risky corporate debtBy Julia Horowitz* London (CNN Business) Companies have spent the years since the global financial crisis binging on debt. Now, as the coronavirus pandemic threatens to push the world into recession <https://edition.cnn.com/2020/03/09/economy/global-recession-coronavirus/in= dex.html>, the bill could come due =E2=80=94 exacerbating damage to the economy and fe= eding a meltdown in financial markets. Looking to take advantage of low interest rates <https://edition.cnn.com/2019/09/12/investing/ecb-interest-rate/index.html>, companies have rushed in recent years to issue bonds whose proceeds could be used to grow their businesses. Corporate debt among non-banks exploded to $75 trillion at the end of 2019, up from $48 trillion at the end of 2009, according to the Institute of International Finance. As the coronavirus spreads =E2=80=94 touching off a plunge in oil prices <https://cnn.com/2020/03/12/investing/oil-prices-trump-europe-travel-ban-co= ronavirus/index.html> and a collapse in travel, and shutting factories <https://edition.cnn.com/2020/03/11/business/fiat-chrysler-italy-plants/ind= ex.html> from Italy to China =E2=80=94 there is increasing alarm that companies in the en= ergy, hospitality and auto sectors won't be able to make their bond payments. That could trigger a spree of ratings downgrades and defaults that would further destabilize financial markets and compound the economic shock. "This certainly is another match being lit [near] the bonfire of corporate debt liabilities," said Simon MacAdam, global economist at Capital Economics. "There's definitely potential for systemic risk." The coronavirus shock Investors became increasingly anxious about corporate debt this week as sto= cks sold off <https://cnn.com/2020/03/11/investing/stock-futures-coronavirus-trump/index= .html> and crude prices nosedived. The ability to buy or sell securities in corporate debt markets has become much more difficult. And the extra returns that investors are demanding to hold corporate debt over more stable government bonds have shot up, signaling that they're now viewed as much riskier holdings. The SPDR Bloomberg Barclays High Yield Bond ETF (JNK <https://money.cnn.com/quote/etf/etf.html?symb=3DJNK&source=3Dstory_quote_l= ink>) dropped more than 6% this week, while the iShares iBoxx $ Investment Grade Corporate Bond ETF fell more than 8%. Bank of America told clients on Friday that volatility had skyrocketed and outflows from corporate bond funds were at record highs. The anxiety is pegged to companies that rely on stable energy prices and tourism to generate cash. When business gets tougher for these firms, it could prevent them from servicing their debt, leading to defaults. Ratings agencies could also start downgrading many of these companies, forcing some bondholders to sell. "Default and downgrade risks have increased to their highest levels since the start of the current business cycle," Lotfi Karoui, chief credit strategist at Goldman Sachs, told clients this week. Much of the risk lies with energy companies, which have ramped up borrowing in recent years to build pipelines and fund other projects. Those companies now face acute pressure due to plummeting oil prices, which have dropped 50% since early January amid evaporating demand for fuel and the implosion of an alliance <https://edition.cnn.com/2020/03/08/investing/oil-prices-crash-opec-russia-= saudi-arabia/index.html> between major energy producers Saudi Arabia and Russia that had helped prevent oil from flooding onto global markets. "Oil producers who were depending on the higher prices to pay back their loans so they could drill for oil are under a significant amount of stress," said Andy Lipow, president of Lipow Oil Associates, a consultancy based in Houston. Investors dumped shares this week in two US energy companies that Morgan Stanley said are at risk of default within the next year: Chesapeake Energy (CHK <https://money.cnn.com/quote/quote.html?symb=3DCHK&source=3Dstory_quote_lin= k>) and Whiting Petroleum Corporation (WLL <https://money.cnn.com/quote/quote.html?symb=3DWLL&source=3Dstory_quote_lin= k>). Chesapeake's stock fell to 15 cents on Thursday, while Whiting shares closed at 75 cents. Airlines, hotels and cruise lines are also in trouble as restrictions on movement grow and more people hunker down at home. A ban on travel <https://edition.cnn.com/travel/article/europe-travel-restrictions-chaos/in= dex.html> from Europe to the United States, announced by the Trump administration on Wednesday, eviscerated airline shares. Budget carrier Norwegian Air, which is heavily indebted, said it would temporarily lay off up to half its workers <https://edition.cnn.com/2020/03/12/business/airline-stocks-trump-europe-tr= avel-ban/index.html> after its stock dropped 22% on Thursday. "Coronavirus' rapidly increasing effect on air travel is placing downward pressure on global airline credit profiles, especially as there are risks that demand takes materially longer than previous shocks to recover," Fitch Ratings said Thursday. It is monitoring American Airlines (AAL <https://money.cnn.com/quote/quote.html?symb=3DAAL&source=3Dstory_quote_lin= k>), which has a significant amount of debt, as well as Alaska Air (ALK <https://money.cnn.com/quote/quote.html?symb=3DALK&source=3Dstory_quote_lin= k>), which is based in Seattle, the site of a significant outbreak in the United States. [image: A flight arrival information board displays cancelled flights at an airport in Japan.] A flight arrival information board displays cancelled flights at an airport in Japan. Automakers are under the microscope, too, as factories in Italy shut down, with more potential closures looming across Europe and in the United States as the number of infections rises in those areas. The industry was already in its third year of a sales recession because of falling demand for vehicles and the US-China trade war. Who holds the debt? With the risk of downgrades and defaults growing, the focus for investors then turns to who holds those liabilities, which could rapidly lose their value. Banks are less exposed to risky corporate debt than they were to bad mortgages in 2008, according to Capital Economics' MacAdam. But that doesn't mean there isn't potential for a corporate debt crisis to reverberate through the financial system. One issue is the growing number of corporate bonds that are rated BBB, at the very low end of the spectrum of what is considered "investment grade" debt. If those bonds get downgraded to high-yield or "junk" status, investment funds could be forced to dump them based on their mandates. That could further stress the market and cause liquidity to dry up. In 2011, corporate bonds rated BBB made up about a third of the market, according to Capital Economics. Today, such bonds account for nearly half of it. Lots of debt issued by energy companies fits that description. An estimated 67% of investment grade debt issued by energy companies is rated BBB, compared to 50% overall, according to Morgan Stanley. And $34 billion of BBB-rated energy debt is already on negative credit watch from one or more ratings agencies. Plus, so-called "shadow banks" =E2=80=94 or financial entities that face fa= r less regulation than traditional lenders =E2=80=94 have snapped up large amounts= of corporate liabilities. A decade of persistently low interest rates has pushed down yields on safer government bonds, encouraging private equity firms, hedge funds and even pension funds to buy riskier assets with higher returns. "As the economic cycle matures and investors have picked all the low-hanging fruit =E2=80=94 the good, solid investments that give a solid r= eturn and aren't too risky =E2=80=94 you're naturally going to be looking for ris= kier and riskier things that years ago you wouldn't have touched with a barge pole," MacAdam said. Emre Tiftik, director of global policy initiatives at the Institute of International Finance, said it's difficult to determine just how vulnerable these players are. "We really don't know that much about private equity and hedge fund exposure," he said. Seeding systemic risk In its most recent financial stability report, the International Monetary Fund raised the alarm about piles of risky corporate debt, which it said could amplify problems and deepen the next recession. The group conducted a stress test based on a hypothetical economic shock that's half as severe as the 2008 global financial crisis. The results suggested that corporate debt worth $19 trillion from eight countries =E2= =80=94 China, the United States, Japan, the United Kingdom, France, Spain, Italy and Germany =E2=80=94 is at risk of default in a future downturn of that ma= gnitude because companies would struggle to generate enough cash to meet repayments. That would be 40% of all corporate debt. A wave of defaults, or even a series of rating downgrades and repricing, would shake the financial system. "The credit market is moving quickly towards the point of no return, where the turn in the credit cycle becomes inevitable and irreversible, as funding sources dry up, issuers face liquidity crunch, credit losses rise, investors rush for the exit, and face extremely thin liquidity on the way out," Oleg Melentyev, head of high-yield credit strategy at Bank of America, told clients Friday. And while this is a standard end to a credit cycle, Melentyev said, it appears to be playing out at three to four times normal speed. Should the situation deteriorate further, it will also have economic consequences as companies hurry to reduce their debt burdens, the IMF noted. There could be waves of layoffs, and business investment could fall off. Defaults would also hit banks and could lead to less lending. Companies could find it more difficult to borrow during the period when they need it the most. This would exacerbate a global recession caused by the coronavirus, which a growing number of economists <https://edition.cnn.com/2020/03/09/economy/global-recession-coronavirus/in= dex.html> now warn is a real possibility. The expectation is that if the world does tip into recession, it would be sharp but short, with the global economy bouncing back as soon as the threat of the virus recedes. But credit risk in the system incorporates a big question mark. "Debt is an automatic destabilizer," MacAdam said. --=20 ---=20 You received this message because you are subscribed to the Google Groups "= Sid-l" group. To unsubscribe from this group and stop receiving emails from it, send an e= mail to [email protected]. To view this discussion on the web visit https://groups.google.com/d/msgid/= sid-l/CACKppcwPA0hRD9Q5DBW-tM%3DUWJW%3D_dbCnR3O_LOtAbNymtvUgg%40mail.gmail.= com. --00000000000034241f05a103293d Content-Type: text/html; charset="UTF-8" Content-Transfer-Encoding: quoted-printable <div dir=3D"ltr"><b><a href=3D"https://www.cnn.com/2020/03/14/investing/cor= porate-debt-coronavirus/index.html" target=3D"_blank">https://www.cnn.com/2= 020/03/14/investing/corporate-debt-coronavirus/index.html</a></b><div><b><b= r></b></div><div><b><font size=3D"4">CNN Business</font><span class=3D"gmai= l_default" style=3D"font-size:large">=C2=A0 =C2=A0 =C2=A0 =C2=A0 =C2=A0 Mar= ch 14, 2020</span><br><br><font size=3D"6">Here's what could really sin= k the global economy: $19 trillion in risky corporate debt<br></font><br><f= ont size=3D"4">By Julia Horowitz</font></b><br><div><br></div><div><div sty= le=3D"box-sizing:border-box"><p style=3D"box-sizing:border-box;margin:0px 0= px 15px;font-size:18px;line-height:1.66667"><font color=3D"#000000"><cite s= tyle=3D"box-sizing:border-box;font-family:"CNN Business",CNN,&quo= t;Helvetica Neue",Helvetica,Arial,Utkal,sans-serif;font-style:normal;f= ont-weight:700;font-feature-settings:"kern"">London (CNN Business= )<span class=3D"gmail_default" style=3D"font-size:small"> </span></cite>Com= panies have spent the years since the global financial crisis binging on de= bt. Now, as the coronavirus pandemic threatens to=C2=A0<a href=3D"https://e= dition.cnn.com/2020/03/09/economy/global-recession-coronavirus/index.html" = style=3D"box-sizing:border-box;text-decoration-line:none" target=3D"_blank"= >push the world into recession</a>, the bill could come due =E2=80=94 exace= rbating damage to the economy and feeding a meltdown in financial markets.<= /font></p></div><div style=3D"box-sizing:border-box;margin-bottom:15px;font= -size:18px;line-height:1.66667;margin-right:0px"><font color=3D"#000000">Lo= oking to take advantage of=C2=A0<a href=3D"https://edition.cnn.com/2019/09/= 12/investing/ecb-interest-rate/index.html" style=3D"box-sizing:border-box;t= ext-decoration-line:none" target=3D"_blank">low interest rates</a>, compani= es have rushed in recent years to issue bonds whose proceeds could be used = to grow their businesses. Corporate debt among non-banks exploded to $75 tr= illion at the end of 2019, up from $48 trillion at the end of 2009, accordi= ng to the Institute of International Finance.</font></div><div style=3D"box= -sizing:border-box;margin-bottom:15px;font-size:18px;line-height:1.66667;ma= rgin-right:0px"><font color=3D"#000000">As the coronavirus spreads =E2=80= =94 touching off a=C2=A0<a href=3D"https://cnn.com/2020/03/12/investing/oil= -prices-trump-europe-travel-ban-coronavirus/index.html" style=3D"box-sizing= :border-box;text-decoration-line:none" target=3D"_blank">plunge in oil pric= es</a>=C2=A0and a collapse in travel, and=C2=A0<a href=3D"https://edition.c= nn.com/2020/03/11/business/fiat-chrysler-italy-plants/index.html" style=3D"= box-sizing:border-box;text-decoration-line:none" target=3D"_blank">shutting= factories</a>=C2=A0from Italy to China =E2=80=94 there is increasing alarm= that companies in the energy, hospitality and auto sectors won't be ab= le to<span style=3D"box-sizing:border-box;font-weight:700">=C2=A0</span>mak= e their bond payments. That could trigger a spree of ratings downgrades and= defaults that would further destabilize financial markets and compound the= economic shock.</font></div><div style=3D"box-sizing:border-box;margin-bot= tom:15px;font-size:18px;line-height:1.66667;margin-right:0px"><font color= =3D"#000000">"This certainly is another match being lit [near] the bon= fire of corporate debt liabilities," said Simon MacAdam, global econom= ist at Capital Economics. "There's definitely potential for system= ic risk."</font></div><div style=3D"box-sizing:border-box;text-align:c= enter;padding-bottom:0px;overflow:hidden;clear:both"><div style=3D"box-sizi= ng:border-box"></div></div><div style=3D"box-sizing:border-box;text-align:c= enter;padding-bottom:0px;overflow:hidden;clear:both"><div style=3D"box-sizi= ng:border-box"><div id=3D"m_-4078296491339647927gmail-ad_nat_btf_01" style= =3D"box-sizing:border-box"></div></div></div><ul style=3D"box-sizing:border= -box;margin:0px 0px 10px;padding:0px;list-style:none"></ul><div style=3D"bo= x-sizing:border-box;margin-bottom:15px;font-size:18px;line-height:1.66667;m= argin-right:0px"><h3 style=3D"box-sizing:border-box;font-size:28px;padding:= 0px;font-family:"CNN Business",CNN,"Helvetica Neue",Hel= vetica,Arial,Utkal,sans-serif;line-height:40px;font-feature-settings:"= kern""><font color=3D"#000000">The coronavirus shock</font></h3></div>= <div style=3D"box-sizing:border-box"><div style=3D"box-sizing:border-box;ma= rgin-bottom:15px;font-size:18px;line-height:1.66667;margin-right:0px"><font= color=3D"#000000">Investors became increasingly anxious about corporate de= bt this week as=C2=A0<a href=3D"https://cnn.com/2020/03/11/investing/stock-= futures-coronavirus-trump/index.html" style=3D"box-sizing:border-box;text-d= ecoration-line:none" target=3D"_blank">stocks sold off</a>=C2=A0and crude p= rices nosedived. The ability to buy or sell securities in corporate debt ma= rkets has become much more difficult. And the extra returns that investors = are demanding to hold corporate debt over more stable government bonds have= shot up, signaling that they're now viewed as much riskier holdings.</= font></div><div style=3D"box-sizing:border-box;margin-bottom:15px;font-size= :18px;line-height:1.66667;margin-right:0px"><div style=3D"box-sizing:border= -box;margin-bottom:15px;line-height:1.66667;margin-right:0px"><font color= =3D"#000000">The=C2=A0<span style=3D"box-sizing:border-box">SPDR Bloomberg = Barclays High Yield Bond ETF</span>=C2=A0<span style=3D"box-sizing:border-b= ox">(<span style=3D"box-sizing:border-box"><a href=3D"https://money.cnn.com= /quote/etf/etf.html?symb=3DJNK&source=3Dstory_quote_link" style=3D"box-= sizing:border-box;text-decoration-line:none" target=3D"_blank">JNK</a></spa= n>)</span>=C2=A0dropped more than 6% this week, while the iShares iBoxx $ I= nvestment Grade Corporate Bond ETF fell more than 8%. Bank of America told = clients on Friday that volatility had skyrocketed and outflows from corpora= te bond funds were at record highs.</font></div><div style=3D"box-sizing:bo= rder-box;margin-bottom:15px;line-height:1.66667;margin-right:0px"><font col= or=3D"#000000">The anxiety is pegged to companies that rely on stable energ= y prices and tourism to generate cash. When business gets tougher for these= firms, it could prevent them from servicing their debt, leading to default= s. Ratings agencies could also start downgrading many of these companies, f= orcing some bondholders to sell.</font></div><div style=3D"box-sizing:borde= r-box;clear:both"></div><div style=3D"box-sizing:border-box;margin-bottom:1= 5px;line-height:1.66667;margin-right:0px"><font color=3D"#000000">"Def= ault and downgrade risks have increased to their highest levels since the s= tart of the current business cycle," Lotfi Karoui, chief credit strate= gist at Goldman Sachs, told clients this week.</font></div><div style=3D"bo= x-sizing:border-box;margin-bottom:15px;line-height:1.66667;margin-right:0px= "><font color=3D"#000000">Much of the risk lies with energy companies, whic= h have ramped up borrowing in recent years to build pipelines and fund othe= r projects. Those companies now face acute pressure due to plummeting oil p= rices, which have dropped 50% since early January amid evaporating demand f= or fuel and the=C2=A0<a href=3D"https://edition.cnn.com/2020/03/08/investin= g/oil-prices-crash-opec-russia-saudi-arabia/index.html" style=3D"box-sizing= :border-box;text-decoration-line:none" target=3D"_blank">implosion of an al= liance</a>=C2=A0between major energy producers Saudi Arabia and Russia that= had helped prevent oil from flooding onto global markets.</font></div><div= style=3D"box-sizing:border-box;margin-bottom:15px;line-height:1.66667;marg= in-right:0px"><font color=3D"#000000">"Oil producers who were dependin= g on the higher prices to pay back their loans so they could drill for oil = are under a significant amount of stress," said Andy Lipow, president = of Lipow Oil Associates, a consultancy based in Houston.</font></div><div s= tyle=3D"box-sizing:border-box;margin-bottom:15px;line-height:1.66667;margin= -right:0px"><font color=3D"#000000">Investors dumped shares this week in tw= o US energy companies that Morgan Stanley said are at risk of default withi= n the next year:=C2=A0<span style=3D"box-sizing:border-box">Chesapeake Ener= gy</span>=C2=A0<span style=3D"box-sizing:border-box">(<span style=3D"box-si= zing:border-box"><a href=3D"https://money.cnn.com/quote/quote.html?symb=3DC= HK&source=3Dstory_quote_link" style=3D"box-sizing:border-box;text-decor= ation-line:none" target=3D"_blank">CHK</a></span>)</span>=C2=A0and=C2=A0<sp= an style=3D"box-sizing:border-box">Whiting Petroleum Corporation</span>=C2= =A0<span style=3D"box-sizing:border-box">(<span style=3D"box-sizing:border-= box"><a href=3D"https://money.cnn.com/quote/quote.html?symb=3DWLL&sourc= e=3Dstory_quote_link" style=3D"box-sizing:border-box;text-decoration-line:n= one" target=3D"_blank">WLL</a></span>)</span>. Chesapeake's stock fell = to 15 cents on Thursday, while Whiting shares closed at 75 cents.</font></d= iv><div style=3D"box-sizing:border-box;margin-bottom:15px;line-height:1.666= 67;margin-right:0px"><font color=3D"#000000">Airlines, hotels and cruise li= nes are also in trouble as restrictions on movement grow and more people hu= nker down at home. A=C2=A0<a href=3D"https://edition.cnn.com/travel/article= /europe-travel-restrictions-chaos/index.html" style=3D"box-sizing:border-bo= x;text-decoration-line:none" target=3D"_blank">ban on travel</a>=C2=A0from = Europe to the United States, announced by the Trump administration on Wedne= sday, eviscerated airline shares. Budget carrier Norwegian Air, which is he= avily indebted, said it would temporarily=C2=A0<a href=3D"https://edition.c= nn.com/2020/03/12/business/airline-stocks-trump-europe-travel-ban/index.htm= l" style=3D"box-sizing:border-box;text-decoration-line:none" target=3D"_bla= nk">lay off up to half its workers</a>=C2=A0after its stock dropped 22% on = Thursday.</font></div><div style=3D"box-sizing:border-box;margin-bottom:15p= x;line-height:1.66667;margin-right:0px"><font color=3D"#000000">"Coron= avirus' rapidly increasing effect on air travel is placing downward pre= ssure on global airline credit profiles, especially as there are risks that= demand takes materially longer than previous shocks to recover," Fitc= h Ratings said Thursday. It is monitoring=C2=A0<span style=3D"box-sizing:bo= rder-box">American Airlines</span>=C2=A0<span style=3D"box-sizing:border-bo= x">(<span style=3D"box-sizing:border-box"><a href=3D"https://money.cnn.com/= quote/quote.html?symb=3DAAL&source=3Dstory_quote_link" style=3D"box-siz= ing:border-box;text-decoration-line:none" target=3D"_blank">AAL</a></span>)= </span>, which has a significant amount of debt, as well as=C2=A0<span styl= e=3D"box-sizing:border-box">Alaska Air</span>=C2=A0<span style=3D"box-sizin= g:border-box">(<span style=3D"box-sizing:border-box"><a href=3D"https://mon= ey.cnn.com/quote/quote.html?symb=3DALK&source=3Dstory_quote_link" style= =3D"box-sizing:border-box;text-decoration-line:none" target=3D"_blank">ALK<= /a></span>)</span>, which is based in Seattle, the site of a significant ou= tbreak in the United States.</font></div><div style=3D"box-sizing:border-bo= x;width:760px"><div style=3D"box-sizing:border-box;clear:both;margin-bottom= :20px;margin-top:20px;width:760px"><div style=3D"box-sizing:border-box"><im= g alt=3D"A flight arrival information board displays cancelled flights at a= n airport in Japan." src=3D"https://cdn.cnn.com/cnnnext/dam/assets/20031311= 4548-global-economy-flight-cancellations-corporate-debt-restricted-exlarge-= 169.jpg" style=3D"box-sizing:border-box;border:0px;display:block;margin-rig= ht:0px" width=3D"472" height=3D"265"><div style=3D"box-sizing:border-box"><= /div><div style=3D"box-sizing:border-box;padding:13px 0px 0px;font-size:0.9= 3333rem;line-height:1.5;margin:0px;border:0px"><div style=3D"box-sizing:bor= der-box"><font color=3D"#000000">A flight arrival information board display= s cancelled flights at an airport in Japan.</font></div></div></div></div><= /div><div style=3D"box-sizing:border-box;margin-bottom:15px;line-height:1.6= 6667;margin-right:0px"><font color=3D"#000000">Automakers are under the mic= roscope, too, as factories in Italy shut down, with more potential closures= looming across Europe and in the United States as the number of infections= rises in those areas. The industry was already in its third year of a sale= s recession because of falling demand for vehicles and the US-China trade w= ar.</font></div><div style=3D"box-sizing:border-box;margin-bottom:15px;line= -height:1.66667;margin-right:0px"><h3 style=3D"box-sizing:border-box;font-s= ize:28px;padding:0px;font-family:"CNN Business",CNN,"Helveti= ca Neue",Helvetica,Arial,Utkal,sans-serif;line-height:40px;font-featur= e-settings:"kern""><font color=3D"#000000">Who holds the debt?</f= ont></h3></div><div style=3D"box-sizing:border-box;margin-bottom:15px;line-= height:1.66667;margin-right:0px"><font color=3D"#000000">With the risk of d= owngrades and defaults growing, the focus for investors then turns to who h= olds those liabilities, which could rapidly lose their value.</font></div><= div style=3D"box-sizing:border-box;margin-bottom:15px;line-height:1.66667;m= argin-right:0px"><font color=3D"#000000">Banks are less exposed to risky co= rporate debt than they were to bad mortgages in 2008, according to Capital = Economics' MacAdam. But that doesn't mean there isn't potential= for a corporate debt crisis to reverberate through the financial system.</= font></div><div style=3D"box-sizing:border-box;margin-bottom:15px;line-heig= ht:1.66667;margin-right:0px"><div style=3D"box-sizing:border-box;margin-bot= tom:15px;line-height:1.66667;margin-right:0px"><font color=3D"#000000">One = issue is the growing number of corporate bonds that are rated BBB, at the v= ery low end of the spectrum of what is considered "investment grade&qu= ot; debt. If those bonds get downgraded to high-yield or "junk" s= tatus, investment funds could be forced to dump them based on their mandate= s. That could further stress the market and cause liquidity to dry up.</fon= t></div><div style=3D"box-sizing:border-box;margin-bottom:15px;line-height:= 1.66667;margin-right:0px"><font color=3D"#000000">In 2011, corporate bonds = rated BBB made up about a third of the market, according to Capital Economi= cs. Today, such bonds account for nearly half of it.</font></div><div style= =3D"box-sizing:border-box;margin-bottom:15px;line-height:1.66667;margin-rig= ht:0px"><font color=3D"#000000">Lots of debt issued by energy companies fit= s that description. An estimated 67% of investment grade debt issued by ene= rgy companies is rated BBB, compared to 50% overall, according to Morgan St= anley. And $34 billion of BBB-rated energy debt is already on negative cred= it watch from one or more ratings agencies.</font></div><div style=3D"box-s= izing:border-box;margin-bottom:15px;line-height:1.66667;margin-right:0px"><= font color=3D"#000000">Plus, so-called "shadow banks" =E2=80=94 o= r financial entities that face far less regulation than traditional lenders= =E2=80=94 have snapped up large amounts of corporate liabilities. A decade= of persistently low interest rates has pushed down yields on safer governm= ent bonds, encouraging private equity firms, hedge funds and even pension f= unds to buy riskier assets with higher returns.</font></div><div style=3D"b= ox-sizing:border-box;margin-bottom:15px;line-height:1.66667;margin-right:0p= x"><font color=3D"#000000">"As the economic cycle matures and investor= s have picked all the low-hanging fruit =E2=80=94 the good, solid investmen= ts that give a solid return and aren't too risky =E2=80=94 you're n= aturally going to be looking for riskier and riskier things that years ago = you wouldn't have touched with a barge pole," MacAdam said.</font>= </div><div style=3D"box-sizing:border-box;margin-bottom:15px;line-height:1.= 66667;margin-right:0px"><font color=3D"#000000">Emre Tiftik, director of gl= obal policy initiatives at the Institute of International Finance, said it&= #39;s difficult to determine just how vulnerable these players are.</font><= /div><div style=3D"box-sizing:border-box;margin-bottom:15px;line-height:1.6= 6667;margin-right:0px"><font color=3D"#000000">"We really don't kn= ow that much about private equity and hedge fund exposure," he said.</= font></div><div style=3D"box-sizing:border-box;margin-bottom:15px;line-heig= ht:1.66667;margin-right:0px"><h3 style=3D"box-sizing:border-box;font-size:2= 8px;padding:0px;font-family:"CNN Business",CNN,"Helvetica Ne= ue",Helvetica,Arial,Utkal,sans-serif;line-height:40px;font-feature-set= tings:"kern""><font color=3D"#000000">Seeding systemic risk</font= ></h3></div><div style=3D"box-sizing:border-box;margin-bottom:15px;line-hei= ght:1.66667;margin-right:0px"><font color=3D"#000000">In its most recent fi= nancial stability report, the International Monetary Fund raised the alarm = about piles of risky corporate debt, which it said could amplify problems a= nd deepen the next recession.</font></div><div style=3D"box-sizing:border-b= ox;margin-bottom:15px;line-height:1.66667;margin-right:0px"><font color=3D"= #000000">The group conducted a stress test based on a hypothetical economic= shock that's half as severe as the 2008 global financial crisis. The r= esults suggested that corporate debt worth $19 trillion from eight countrie= s =E2=80=94 China, the United States, Japan, the United Kingdom, France, Sp= ain, Italy and Germany =E2=80=94 is at risk of default in a future downturn= of that magnitude because companies would struggle to generate enough cash= to meet repayments. That would be 40% of all corporate debt.</font></div><= div style=3D"box-sizing:border-box;margin-bottom:15px;line-height:1.66667;m= argin-right:0px"><font color=3D"#000000">A wave of defaults, or even a seri= es of rating downgrades and repricing, would shake the financial system.</f= ont></div><div style=3D"box-sizing:border-box;margin-bottom:15px;line-heigh= t:1.66667;margin-right:0px"><font color=3D"#000000">"The credit market= is moving quickly towards the point of no return, where the turn in the cr= edit cycle becomes inevitable and irreversible, as funding sources dry up, = issuers face liquidity crunch, credit losses rise, investors rush for the e= xit, and face extremely thin liquidity on the way out," Oleg Melentyev= , head of high-yield credit strategy at Bank of America, told clients Frida= y.</font></div><div style=3D"box-sizing:border-box;margin-bottom:15px;line-= height:1.66667;margin-right:0px"><font color=3D"#000000">And while this is = a standard end to a credit cycle, Melentyev said, it appears to be playing = out at three to four times normal speed.</font></div><div style=3D"box-sizi= ng:border-box;margin-bottom:15px;line-height:1.66667;margin-right:0px"><fon= t color=3D"#000000">Should the situation deteriorate further, it will also = have economic consequences as companies hurry to reduce their debt burdens,= the IMF noted. There could be waves of layoffs, and business investment co= uld fall off. Defaults would also hit banks and could lead to less lending.= Companies could find it more difficult to borrow during the period when th= ey need it the most.</font></div><div style=3D"box-sizing:border-box;margin= -bottom:15px;line-height:1.66667;margin-right:0px"><font color=3D"#000000">= This would exacerbate a global recession caused by the coronavirus, which a= =C2=A0<a href=3D"https://edition.cnn.com/2020/03/09/economy/global-recessio= n-coronavirus/index.html" style=3D"box-sizing:border-box;text-decoration-li= ne:none" target=3D"_blank">growing number of economists</a>=C2=A0now warn i= s a real possibility.</font></div><ul style=3D"box-sizing:border-box;margin= :0px 0px 10px;padding:0px;list-style:none"></ul><div style=3D"box-sizing:bo= rder-box;margin-bottom:15px;line-height:1.66667;margin-right:0px"><font col= or=3D"#000000">The expectation is that if the world does tip into recession= , it would be sharp but short, with the global economy bouncing back as soo= n as the threat of the virus recedes. But credit risk in the system incorpo= rates a big question mark.</font></div><div style=3D"box-sizing:border-box;= margin-bottom:15px;line-height:1.66667;margin-right:0px"><font color=3D"#00= 0000">"Debt is an automatic destabilizer," MacAdam said.</font></= div></div></div></div></div></div></div> <p></p> -- <br /> <br /> --- <br /> You received this message because you are subscribed to the Google Groups &= quot;Sid-l" group.<br /> To unsubscribe from this group and stop receiving emails from it, send an e= mail to <a href=3D"mailto:[email protected]">sid-l+unsubsc= [email protected]</a>.<br /> To view this discussion on the web visit <a href=3D"https://groups.google.c= om/d/msgid/sid-l/CACKppcwPA0hRD9Q5DBW-tM%3DUWJW%3D_dbCnR3O_LOtAbNymtvUgg%40= mail.gmail.com?utm_medium=3Demail&utm_source=3Dfooter">https://groups.googl= e.com/d/msgid/sid-l/CACKppcwPA0hRD9Q5DBW-tM%3DUWJW%3D_dbCnR3O_LOtAbNymtvUgg= %40mail.gmail.com</a>.<br /> --00000000000034241f05a103293d-- ------------=_1584409847-7785-133691 Content-Type: text/plain; charset="UTF-8" Content-Disposition: inline Content-Transfer-Encoding: 8bit --- To unsubscribe: <mailto:[email protected]> List help: <https://riseup.net/lists> ------------=_1584409847-7785-133691--