According to Bloomberg News, the United States was on a borrowing spree last year. The consequences could make it difficult for the Federal Reserve to counter inflation, which will be difficult to avoid a crash in the economy.
There has been a rise in corporate debt by $1.3 trillion since the beginning of 2020 as debtors had availed the benefit of the Fed’s emergency measure when the pandemic was found to spread, curbing interest rates and stopping the financial markets, thereby keeping a constant credit flow. More outstanding debts held by more companies indicate that the cost of borrowing might rise from the prevailing low levels.
The scenario could lead to concerns about financial stability for Fed Chair Jerome Powell and his team as they carry on the debate about eliminating the pandemic support implied in a report Friday that revealed the hottest ever price rise in the last 40 years.
The biggest challenge facing Powell is curtailing the price pressures without causing considerable costs to growth in employment. This move would perhaps make political parties angry and hurt his career since the 1990-1991 downturn.
Bloomberg News also reports that the Fed Financial Stability Report November 2nd stated that the key aspects that determine susceptibility from business-related debts, including leverage and interest cover ratios, had gone back to the pre-pandemic levels.
Finishing off the tapering off sooner allows Fed the opportunity to increase the rates sooner and faster in case inflation fails to ease out next year as it is being anticipated. However, the record debt levels could compel them to think about their actions.
The emergency response of the Fed comprised support to the corporate sector. However, the intervention was not a large scale but the backstop, however, triggered a record surge in borrowing at historically low rates.
According to Moody’s Investor Service, the combination has triggered the duration of an investment-grade bond to near records and fostered requirements for five-year refinancing to an all-time high at a figure recorded as $2.5 trillion, reports Bloomberg News.
Those companies that took this opportunity to extend longer-dated bonds are now seeing their balance sheets strengthened. These bonds were offered at lower rates.
Despite many companies taking advantage of lower rates, almost 500 companies are expected to explore the refinance market next year as per S&P Global Ratings. As per Fitch’s forecast, the small and medium-sized companies that do not have ratings for their loans might have to struggle.
Corporate America comprises weaker firms, also known as zombie companies since they do not generate adequate cash flow to fund their debt payouts. These firms could be vulnerable since the cost of borrowing might back up.
In addition to the prevailing scenario, the firm’s average credit rating has been on the downside as per Moody’s. This is a warning that few firms could land trouble paying off their debts if there is a surge in the service costs.
