Racing towards recession? Is debt financing the answer?
The year was 2010. In the wake of the Global Financial Crisis, borrowing among the 34 richest nations was ramped up to $10.9 trillion – nearly 17% of the global GDP. Fast forward to 2019. Borrowing among those countries now stands at $11.4 trillion – about 13% of global GDP (almost 19% if China is excluded). These figures are cause for grave concerns, especially since most of these OECD economies have grown at a snail’s pace over the past decade. Increased borrowing without robust growth may pose to be a major issue for governments in case the world faces another recession.
Borrowing in 2019 reached a record high, and coupling this with the unprecedented increase of corporate-bond debt means that the volume of non-financial corporate bonds currently stands at an all-time high of $13.5 trillion.
However, a noteworthy aspect of this is that most firms engaged in debt financing from international markets do not necessarily require the additional cash flow. They exhibit adequate financial health to reinvest and expand their businesses as well as cover daily expenditures. Then why are they borrowing so rapidly, and in such high volumes?
It is to satisfy the hunger of their voracious investors and keep providing high dividends year after year, irrespective of fluctuations in profit margins and revenue. In this process of appeasing sovereign wealth funds, big investment houses and pension funds, it is alarming to observe that more of today’s outstanding corporate bonds is closer to junk status than in any previous credit cycle. JP Morgan Chase chief, Jamie Dimon, however, believes that corporate borrowing isn’t the main problem, government borrowing is (although it is unlikely that he would remark against corporate debt, since the firm he chairs is one of the biggest profiteers from it).
High levels of government debt are definitely a major issue. If inflation is to ever rise from supply-side shocks or if central banks were to increase repo rates, several governments would have the rug pulled out from beneath their feet – leading to a very high possibility of a recession, all over again.
