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Nearly $10 Trillion US Corporate Debt Threatens To Set Off Financial Meltdown

Last modified: Sep 29, 2022

The US corporate debt almost hit the $10 trillion mark due to policies that allow major central banks in providing cheap money to financial markets. This amount is equivalent to 47% of the GDP; as it rises, new financial problems will come about. 

Although the effects would not be felt at once, financial markets could go down when the next recession hits, regulators and investors say. 

The “weakest” firms were responsible for most of the debt growth. Reports say that they were not using the money to finance investments in plant and equipment. Instead, they used it for investor payouts, deal-making, and other financial risk-taking activities. 

Companies that wanted to increase their share market valuations also contributed to the growing corporate debt in the US. In fact, since 2019, US companies have spent over four trillion dollars for this purpose. 

One of the members of the Institute of International Finance, Emre Tiftik, remarked that it’s like the US was at the top of an unexploded bomb; people don’t exactly know what will trigger the explosion.

Apart from the US, increased corporate debt vulnerabilities were also observed in other countries. What’s more, people fear that such vulnerabilities can lead to a financial crisis once the global economy collapsed. 

Money is continuously used for financing riskier assets despite the warnings about the financial meltdown. The reason being is that the world’s central banks are following the low-interest rate regime. Clearly, what’s happening is that companies are doing the “logical” thing — borrowing cheap and borrowing for too long — just because they can. 

Meanwhile, Galia Velimukhametova, senior investment manager at Pictet Asset Management emphasized the increasing number of “zombie” companies in major economies. These are companies that are only kept alive because of the low-interest rate regime; their interest costs are higher than their annual earnings. 

The US Federal Reserve, on the other hand, became worried about the growing corporate debt and its impact on the stability of the financial system. During its rate-setting committee in late October, several officials said that corporate debt imbalances increased. In addition, deteriorating credit quality was also considered a threat to the corporate bond markets. 

Now, all these things considered, the overall effect of the growing corporate debt could be pretty shocking for the State’s economy. 

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