tchan1_Yuichiro Chino_GettyImages_stock market Yuichiro Chino/Getty Images

A Debt Crisis Is Not Imminent

The short-term economic outlook remains worrying worldwide, particularly for borrowers at the lower end of the credit scale or in the industries hit hardest by COVID-19 restrictions. But a large-scale debt crisis may not be nearly as likely as many fear.

NEW YORK – As countries, companies, and households confront the COVID-19 pandemic’s economic fallout, many market watchers are sounding the alarm about rapidly rising leverage worldwide. And for good reason: in an acceleration of a years-long trend, the debt-to-GDP ratio among these three sets of borrowers is set to swell by 14% this year, to a record 265%. But while this has raised the risk of insolvencies and defaults, particularly among corporations, S&P Global Ratings believes a near-term debt crisis is unlikely.

Given the higher leverage and a challenging operating environment, S&P has downgraded the credit ratings of roughly one-fifth of corporate and sovereign debt issuers globally, especially speculative-grade borrowers and those suffering the most from COVID-19’s economic effects. For corporate borrowers, insolvency risks are likely to increase if cash flows and earnings do not return to pre-pandemic trend levels before extraordinary fiscal stimulus is withdrawn.

In our view, the world is likely to experience a gradual, albeit choppy, economic recovery, assuming that accommodative financing conditions are maintained, in a lower for longer environment, and adjustments to spending and borrowing behavior are made. Add to that a widely available COVID-19 vaccine by mid-2021, and global leverage should flatten out around 2023, with governments scaling back stimulus, firms slowly repairing their balance sheets, and households spending more conservatively.

To continue reading, register now.

As a registered user, you can enjoy more PS content every month – for free.

Register

or

Subscribe now for unlimited access to everything PS has to offer.

https://prosyn.org/OX8dAfE