Pedestrians walk past the skyline of the financial district PHILIPPE LOPEZ/AFP/Getty Images

Are We in a Corporate-Debt Bubble?

In the decade since the global financial crisis, the value of nonfinancial companies' outstanding bonds has nearly tripled, owing not least to growth in corporate debt in emerging markets. But while a correction seems likely as defaults rise, the broad shift toward bond financing is actually a welcome development.

WASHINGTON, DC – Is growing corporate debt a bubble waiting to burst? In the ten years since the global financial crisis, the debt held by nonfinancial corporations has grown by $29 trillion – almost as much as government debt – according to new research by the McKinsey Global Institute. A market correction is likely in store. Yet the growth of corporate debt is not as ominous as it first appears – and, indeed, in some ways even points to a positive economic outcome.

Over the past decade, the corporate-bond market has surged as banks have restructured and repaired their balance sheets. Since 2007, the value of corporate bonds outstanding from nonfinancial companies has nearly tripled – to $11.7 trillion – and their share of global GDP has doubled. Traditionally, the corporate-bond market was centered in the United States, but now companies from around the world have joined in.

The broad shift to bond financing is a welcome development. Debt capital markets provide an important asset class for institutional investors, and give large corporations an alternative to bank loans. Yet it is also clear that many higher-risk borrowers have tapped the bond market in the years of ultra-cheap credit. Over the next five years, a record $1.5 trillion worth of nonfinancial corporate bonds will mature each year; as some companies struggle to repay, defaults will most likely rise.

To continue reading, please log in or enter your email address.

To read this article from our archive, please log in or register now. After entering your email, you'll have access to two free articles from our archive every month. For unlimited access to Project Syndicate, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/iz8mdLE;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.