"High Corporate Debt... Rising Concerns Over Credit Crisis Due to COVID-19"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] There is an analysis that the spread of the novel coronavirus infection (COVID-19) could deal a blow to the current financial market, where the scale of debt has increased due to prolonged low interest rates. There are concerns that if corporate sales decline due to the spread of COVID-19, the credit ratings of corporate bonds and others will fall, potentially leading to a credit crisis.

According to major foreign media on the 3rd (local time), the total global debt compiled by the International Institute of Finance (IIF) stood at $253 trillion as of the third quarter of last year, recording 322% of the gross domestic product (GDP). This is an all-time high. Experts say that if the spread of COVID-19 continues, it could exploit weaknesses in the financial market and trigger a new debt crisis, according to foreign media.

Since the 2007-2008 global financial crisis, central banks have lowered benchmark interest rates and implemented quantitative easing policies, resulting in prolonged low interest rates. As borrowing costs decreased, companies have issued a large amount of corporate bonds to secure funds and utilized them for business. Foreign media analyzed that currently, private sector debt is concentrated in the corporate sector rather than real estate.

According to a recent report released by the Organisation for Economic Co-operation and Development (OECD), the global corporate bond market reached $13.5 trillion at the end of December last year, marking an all-time high. This is double the size compared to the end of 2008. The OECD pointed out, "Overall bond quality has deteriorated compared to before the global financial crisis," adding, "Repayment conditions have become stricter, maturities longer, and investor protections weaker."

The Federal Reserve estimates that corporate bonds, which were $3.3 trillion before the global financial crisis, increased to $6.5 trillion last year. Considering that Alphabet, Apple, Facebook, and Microsoft held $328 billion in cash at the end of last year, debt appears to be concentrated more in traditional companies than in large IT firms.

The problem is that if supply chains collapse and profits decline due to COVID-19, cash liquidity will drop sharply. If corporate lending also becomes difficult, a sudden credit crunch could occur in the market. Although global economic leaders are attempting to prevent economic slowdown caused by COVID-19 through active fiscal and monetary policies, some experts believe this situation could further worsen the debt crisis.

Mohamed El-Erian, Chief Economic Advisor at Allianz and a fellow at Queen’s College, Cambridge University, wrote in a contribution to foreign media that if the credit rating of corporate bonds falls to junk bond levels due to COVID-19, the financial market will be at risk. He evaluated that "both companies and investors need to consider the credit crisis and carefully assess the economic and financial impacts of COVID-19."

This content was produced with the assistance of AI translation services.