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increase if cash flows and earnings do not return to pre-pandemic trend levels before extraordinary fiscal stimulus is withdrawn.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.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.



Register for FREE to access two premium articles per month.