‘Normal’ Interest Rates Would Add $ 1 Billion Debt to Trending Stocks
The stress test assumes that interest rates return to levels that we considered normal before the global financial crisis led to a prolonged period of low rates. Although the agency does not foresee this as a baseline scenario, it points out that before 2008, these interest rates were indeed the baseline scenario.
The sample covered more than 24,000 companies, a select group of rated sovereign borrowers, while also exploring household indebtedness in major economies.
The key revelation from the analysis of $ 44 trillion ($ 61 trillion) in corporate debt is that higher debt servicing costs coupled with higher input costs implied by rising debt. inflation will shift over $ 1 trillion of debt onto the balance sheets from losses. doing business.
The share of debt owed by loss-making companies is already double the average of the last decade, at 7%. Thus, a 3 percentage point increase in borrowing costs would raise the rate to 10 percent, while the double shock of increases in interest rates and input costs would push the ratio to 12 percent.
The bad news for Australia is that the loss ratio is high, but the good news is that it is caused by a “single large borrower” that it refuses to name in the government-linked telecommunications sector (spoiler, this is NBN Co).
Excluding it would reduce the ratio to 7 percent, which is more in line with that of other developed countries.
Governments around the world largely pass the stress tests on rates and inflation, but five of the 20 emerging sovereigns would face an increase in interest charges equivalent to 1 percentage point of GDP.
As a sovereign borrower, Australia’s debt servicing costs would hardly be affected, says S&P Global.
But there would be pain among households, as Australia is part of the most indebted cluster alongside Canada, South Korea, the Netherlands and Switzerland.
“A uniform exercise of an interest rate shock of 300 basis points would return households to the debt service positions they held in 2008 [during the global financial crisis]. “
The situation in the United States is more nuanced.
Overall, US household balance sheets have improved. However, the bottom 50 percent in terms of income have significantly more consumer debt, with their share of outstanding loans increasing from 29 percent of assets to 49 percent.
The poorest 50 percent also have less money. While the share of cash and deposits among the richest 1 percent fell from 15 percent to 29 percent, the poorest 50 percent slipped from 13 percent to 7 percent.
If there is one conclusion to be drawn, it is that since the global financial crisis, the policy of debt, deficits and central banks has changed.
In an era of low inflation and limited public spending, central banks have been forced to keep rates low; which arguably fueled income inequality. But they can’t afford for this side effect to reappear, and as US President Joe Biden is finding out, the increasingly popular course of action is not to support asset prices but to counter an increase in the cost of life that exceeds wages. growth.
Federal Reserve Chairman Jerome Powell appears to have received the note, but it remains to be seen how significant those inflationary pressures are. What we can be sure of is that the plight of $ 1 trillion in debt and equity in loss-making companies will not be his priority.