Hangovers from corporate-debt booms rarely cause significant economic damage
Many regulators were sounding the alarm about elevated company debt even before the covid-19 pandemic. Since then, the hit to firms’ incomes has led to a wave of rating downgrades: between March 2020 and March 2021, Fitch, a ratings agency, downgraded 460 firms, or almost 20% of its corporate portfolio. While defaults have eased this year as economies have recovered, many firms will be burdened by higher levels of debt for years to come.
Intriguingly, however, hangovers from corporate-debt booms rarely cause significant economic damage, even if creditors themselves suffer when firms default. A recent paper by Moritz Schularick, of the University of Bonn, and several coauthors, examines data on business cycles for 17 advanced countries over more than a century, and compares corporate-debt busts with those associated with household borrowing .
The authors argue that lenders often have an incentive to restructure old corporate loans, reducing the risk of “zombie” companies persisting, and freeing up finance to support the next recovery. For household debt, however, restructuring thousands of individual loans is often impossible, and lenders may be more inclined to keep the loans on their books in the hope that house prices eventually recover.
In much of the rich world, there are reasons to be cautiously optimistic. The largest lenders are in much better health than in 2008. All of the major regulatory authorities carried out stress tests during 2020, using macroeconomic scenarios much more severe than have actually transpired, but their banking systems were able to absorb large corporate losses and carry on lending.
There will be a mountain of corporate debt in many countries for some time. But that does not mean the recovery will necessarily falter.This article appeared in the Finance & economics section of the print edition under the headline "A mountain but not a volcano"
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