Companies in the United States are now facing the highest levels of debt on record – $10.5 trillion (£7.5 trillion approx.) is the current record-breaking figure according to the Federal Reserve and the Securities Industry and Financial Markets Association (SIFMA). Arguably, coronavirus is the largest contributor to the significant increase in corporate debt within America.
The corporate debt market is where companies are aided in borrowing money; over the past decade, the rate of interest has been substantially low due to the 2008 financial crisis which had made borrowing easier than it was before the recession. Since then, companies have been using the low-interest rates to their advantage and were regularly selling their bonds. Due to the ease of borrow, companies occasionally became careless with their debt which has led some companies in facing the status of ‘high-risk’ due to being unable to pay back the interest payments.
Not all corporate bonds and or debt are at high risk of being unable to pay back the interest payments. In the plight of the coronavirus, some businesses are visibly at greater levels of uncertainty than other companies. Energy companies are caught in the middle of oil pricing wars bounded by Russia, Saudi Arabia, and the United States; whilst having acknowledged that, many energy companies are predicted to file for bankruptcy as a result. Alternately, travel companies are largely suffering from travel bans in addition to the consumer being fearful of traveling due to the pandemic. Entertainment companies inclusive of cinema chains are suffering from closures and more consumers have found comfort in being able to consume from home.
Inflation concerns and the rise in interest rates are a large cause for concern for Wall Street. A factor of every type of corporate debt is the exclusion of non-financial services. As it stands, the current figure for global corporate debt is $75 trillion (£54 trillion approx.); this is inclusive of debt owed to banks and other creditors as well as bonds. The current figure is a $27 trillion (£19.5 trillion) increase from 2009 when the figure stood at $48 trillion (£34 trillion approx.) and a $43 trillion (£31 trillion) increase from the 2005 figure which stood at $32 trillion (£23 trillion approx.).
The International Monetary Fund issued a recent financial (in)stability report implying that eight of the major economies hold a total of $51 trillion in corporate debt – $19 trillion of this debt is at high risk of not being paid back in the next decline in business activity and or economic activity which at present could be inclusive of the effect of the coronavirus and or deep financial depression.
The coronavirus has arguably had a significant effect on the accumulation of debt by corporate companies in the United States and it is unforeseen as to when companies who at risk of default in the next downturn will be able to pay back interest payments. In the second quarter of last year, the United States wanted to borrow $3 trillion (£2.4 trillion approx.) as a result of coronavirus-related rescue packages obstructing companies in being able to closely align with their budgets.
Conclusively, the bond bubble in the United States is seemingly becoming a cause for concern in the American economy. The contribution of the coronavirus has led to a substantial increase in America’s borrowing and has consequently landed them a record-breaking figure of $10.5 trillion in debt. The figure is largely a result of the pandemic as well as the aid in ease in borrowing due to 2008 financial; the low-interest rate because of the crisis aided in making borrowing easier than ever for companies.
Consequently, easy borrowing has led to companies facing bankruptcy as a result of being unable to pay back an existing debt. Ultimately, the figure may arguably see a further record-breaking figure as a result of the pandemic on the uncertainty companies are now facing.
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