Fears Of Massive Corporate ‘Debt Bomb’ Grow As Stock Market Tanks

New fears are beginning to emerge about a potential ‘corporate debt bomb’ which could send the global economy into a tail spin if the Coronavirus continues to plague the stock market.

As Greenwich Time reports:

The coronavirus panic could threaten a $10 trillion mountain of corporate debt, unleashing a cycle of layoffs and business spending cuts that would hit the economy just as some analysts are warning of a recession.

Financial markets already are showing major signs of stress. Investors are demanding higher interest payments in return for lending to less creditworthy companies; some businesses are delaying their planned bond sales while they wait for Wall Street to settle down; and ratings agencies are moving toward downgrading some corporate borrowers.

The mammoth debt bulge includes a dramatic increase in borrowing by the lowest quality investment grade firms — those rated just one level above “junk.” More than $1 trillion in “leveraged loans,” a type of risky bank lending to debt-laden companies, is a second potential flash point.

Watchdogs including the Federal Reserve have warned for years that excessive borrowing by corporations, including some with subpar credit ratings, might eventually blow a hole in the U.S. economy. Now, as Wall Street wrestles with a global epidemic, the debt alarms show how investors are reassessing risks they overlooked during the long economic expansion.
The true danger, according to some experts, is if businesses hit hard by Coronavirus cancellations begin to default on their outstanding and highly leveraged loans it could cause a disastrous cascade effect throughout the economy, resulting in a crisis of potentially historic proportions.

 

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