Coronavirus May Light Fuse on ‘Unexploded Bomb’ of Corporate Debt

28/04/2020

A surge of risky borrowing by companies around the world leaves the global economy especially exposed to the potential costs of the outbreak.

By Peter S. Goodman
March 11, 2020

To grasp why the most important central banks — from the Fed to the Bank of England to the Bank of Japan — are now leaping into action as if the world were on fire, it helps to examine the subject of corporate debt.

For years, wonks bearing spreadsheets have warned that corporations around the planet were developing a dangerous addiction to debt. Interest rates were so low that borrowing money was essentially free, enticing companies to avail themselves with abandon. Something bad was bound to happen eventually, leaving borrowers struggling to make their debt payments. Lenders would grow agitated, tightening credit for everyone. The world would confront a fresh crisis.

Something bad is now happening. As the coronavirus outbreak spreads, halting factories from China to Italy, sending stock markets plunging and prompting fears of a worldwide recession, historic levels of corporate debt threaten to intensify the economic damage. Companies facing grave debt burdens may be forced to cut costs, laying off workers and scrapping investments, as they seek to avoid default.