- Corporations have almost $10 trillion in debt on their balance sheets, equivalent to 47% of the entire U.S. economy.
- The IMF and Federal Reserve are concerned over the risks posed by such high levels of debt.
- Peaks in corporate debt levels have historically coincided with recessions.
According to data cited by the Washington Post, corporate debt levels are at record highs — and climbing. U.S. corporations hold a combined total of almost $10 trillion (with a T) of debt, the equivalent of 47% of the entire U.S. economy.
In the wake of the Great Recession of 2008, central banks around the world lowered interest rates to historic lows in order to encourage borrowing and growth. Interest rates in the U.S. are near record lows, while some countries even have negative government bond interest rates.
These sustained low rates have allowed corporations to take on massive amounts of debt and pursue higher levels of “financial risk-taking,” according to a report from the IMF published in October.
“Corporate leverage can also amplify shocks, as corporate deleveraging could lead to depressed investment and higher unemployment, and corporate defaults could trigger losses and curb lending by banks,” the IMF wrote.
The IMF estimates that in a recession half as severe as the 2008 financial crisis, almost 40% of all corporate debt in major economies — $19 trillion worth — could become ‘at-risk’, meaning firms would not be able to cover interest expenses with their profits.
The U.S. Federal reserve echoes the IMF’s warnings. “In an economic downturn, widespread downgrades of [corporate] bonds to speculative-grade ratings could lead investors to sell the downgraded bonds rapidly, increasing market illiquidity and downward price pressures in a segment of the corporate bond market known already to exhibit relatively low liquidity,” the central bank wrote.
HSBC bank has analyzed historical trends in corporate debt and how it relates to the broader economy. Strikingly, peaks in the corporate debt level correlate strongly to periods of recession, shown here in grey.
U.S. Non-Financial Debt as Share of GDP
Corporate debt has been steadily moving upward in relation to U.S. GDP in the post-World War II period. While debt levels are reduced after each downturn, the lows are always higher than the lows of the preceding period.
Corporate debt levels have just recently past their previous peaks, set in the Great Recession. If past is prologue, the charts indicate there will be another downturn soon followed by a deflation of corporate debt.