The role of corporate debt in financial crises
In this paper, Ivashina et al. present a comprehensive analysis of the role of corporate debt in the dynamics of financial crises, boom-bust cycles, and macroeconomic recoveries. The authors use a dataset covering 115 advanced and emerging economies from 1940 to 2014. This dataset allows the measurement of outstanding credit by industry, includes a new time series on credit to non-bank financial institutions, and covers 87 episodes of systemic financial crises.
Firm debt accounts for about two-thirds of the aggregate credit growth in the three years preceding financial crisis. After a crisis hits, the ensuing credit crunch is entirely concentrated in credit to firms, as is the vast majority of loans that become nonperforming. These results contrast sharply with the patterns for household debt, which continues to grow relative to GDP even after a financial crisis has started, and tends to account for only a small fraction of nonperforming loans after crises. An expansion in firm debt can be just as significant as household debt for predicting crises, if not more so, and it also predicts the depth of the post-crisis recession, especially if it is backed by real estate collateral.
Why do these results differ from existing literature? Ivashina et al. argue that there are three reasons why:
- Their dataset covers a large number of countries over a 74 year period, unlike other studies that either use data from only 17 advanced countries or use more recent data, in many cases starting only in the 1990s.
- They focus on financial crises rather than average output growth: while household debt predicts negative output growth, firm debt may be particularly relevant for output crashes, “i.e., the left tail of growth.”
- Using data disaggregated by industry allows the examination of a more granular and robust link between firm credit and financial crises.
Corporate Debt, Boom-Bust Cycles, and Financial Crises
Authors: Victoria Ivashina, Ṣebnem Kalemli-Özcan, Luc Laeven, Karsten Müller
From: Harvard Business School, University of Maryland, University of Maryland, National University of Singapore
The 2024 credit outlook
This report from S&P Global Ratings indicates that corporate debt defaults increased by 80% in 2023, marking the highest default rate outside of the Covid-19 pandemic period in the last seven years. The report forecasts further credit deterioration in 2024, especially among lower-rated companies. Some of the findings include:
- Defaults have increased to above historical averages in the U.S. and Europe, and are poised to increase further in 2024 as debt maturities ramp up and competition for funding intensifies. S&P Global Ratings now expects the trailing-12-month speculative-grade default rates in the U.S. and Europe to reach 5% and 3.75%, respectively, by September, under their base case for a soft landing.
- Health care, and homebuilders, and real estate, suffered the highest deterioration in terms of negative ratings in 2023 globally. On the other side, the oil and gas sector has the highest positive bias, at 17.5%, as energy cash flows remain strong despite geopolitical challenges and weaker prices.
- In the U.S., the proportion of ‘CCC/C’ ratings among all corporate borrowers is historically large, at 7%, with many of these firms suffering negative cash flows and large maturities due in 2024 and 2025. A drop in growth or a further rise in interest rates, could increase the default rate.
Global Credit Outlook 2024: New Risks, New Playbook
By: S&P Global Ratings
