In November 2019, as corporate debt levels in the US neared the $10-trln mark — about 47% of the country’s GDP — an article in The Washington Post found it apt to recall the global financial crisis of 2008-09 and warn of a possible “fresh turmoil” because of surging debt.
The article went on to add that while those debt levels may not themselves lead to a recession, they “…could make the next… (recession) much worse”. One might almost blame the writer for speaking – or writing – too soon.
Since then, things have just gotten worse. By March 31, 2020, US non-financial corporate debt rose to an unprecedented $10.5 trln — the highest recorded level since World War 2. What’s more alarming is that bond issuances by companies with the lowest investment-grade ratings form the major chunk of that debt, according to a Bloomberg report.
The debt problem is not confined to the US alone. The coronavirus pandemic has led to a general rise in debt levels around the world as large-scale lockdowns have brought much business activity to a halt, forcing companies big and small to borrow funds for sustenance. Governments and central banks in many countries have come out with measures to help companies tide over the crisis. A Reuters report dated July 13, 2020, projected global corporate borrowing of $1 trln in 2020 as companies try to stay afloat amid a pandemic-induced recession.
The facts are out there for all to see. An issue that was causing concern even before the pandemic now essentially assumes ‘red-alert’ proportions. And that brings us to the question: How does one ensure that these unprecedented debt levels do not lead the US and the world economy into a downward spiral?
To answer that question, we could refer to a March 2019 essay by Robert Kaplan, president of the Federal Reserve Bank of Dallas. Kaplan writes that financial sector debt in the US could be brought down from a historic high of almost 124% of the GDP in September 2008 to 78% by September 2018. “This decline was accompanied by substantially more stringent post-crisis financial sector regulations and oversight intended to reduce the systemic risk and improve the resiliency of the US financial sector.”
What does that tell us? A sharper focus on oversight has a direct correlation with reducing debt levels.
Of course, the pandemic does not seem to be the time to focus on reducing debt. Enterprises the world over – more so the ones that are small and medium-sized, which form the backbone of several economies – are struggling to find their feet. Trying to dry up capital raising avenues for these enterprises, both in the form of bond issuances and loans, may worsen the crisis.
Having said that, governments and lenders can most certainly introduce or strengthen mechanisms that allow them to monitor debt portfolios more effectively.
With small and medium enterprises that form the backbone of several economies struggling to find their feet, the pandemic does not seem to be the time to focus on bringing debt levels under control. But governments and lenders must introduce or strengthen mechanisms to allow monitoring of debt portfolios more effectively
Banks and non-bank lenders must find ways to track borrowers’ financial health not just more frequently, but also with greater ease. If such information can be standardized and available in a digital open-source format, it can lend itself to much quicker detection of trends, modeling for early warning signs of systemic failures, and providing governments with information that can help shape policies in a more proactive manner.
In the US, the Federal Reserve could look at the direct leverage market, where non-bank financial companies such as private equity funds, hedge funds, insurers, and pension funds give loans to small and medium-sized firms. The size of this market is unknown, but it is possible to over several hundreds of billions of dollars, according to Standard and Poors.
Putting in place systems for more effective reporting about bond issuances, loans, and usage of such funds may well head off any potential crisis, both at the level of individual lenders and the government. The economy would benefit greatly from transparency on these fronts. One standard that could be considered is XBRL or eXtensible Business Reporting Language – a tried and tested language for business reporting that has been adopted by regulators across the globe.
IRIS is a pioneer in the XBRL reporting space with a global footprint in over 35 countries, and the name IRIS inspires trust amongst both regulators and filers. Our solutions have benefitted more than 1.5 mln filers across the globe since the year 2005. We have been working with filers in the US markets since the start of the SEC XBRL mandate, and IRIS CARBON®, our cloud-based collaborative solution for issuers, consistently tops XBRL quality assessments put out by independent third-party reviews.