Businesses are facing a significant debt hangover in the near future. The economies of the West have been experiencing a period of uncertainty, with the banking sector crisis and the possibility of America defaulting on its debt. The concern now is the substantial debt accumulated by non-financial companies due to low interest rates. Since 2000, non-financial corporate debt in America and Europe has increased from $12.7trn to $38.1trn, representing 68% to 90% of their combined GDP. Although the possibility of a corporate-debt-fuelled catastrophe in the West is slim, businesses will soon face the consequences of their debt, which will limit their options in the coming years.
The corporate-debt pile in the West has been less unstable than anticipated. Approximately one-third of debt covered by credit-rating agencies on both sides of the Atlantic is considered speculative grade, also known as junk, with uncertain prospects for repayment. The default rate for these debts remains at a comfortable 3% in both America and Europe (see chart 1). Although there was a pandemic-era increase in downgrades from investment grade to speculative, this has largely been reversed.
