Category Archives: corporate debt

8/3/20: Global Economy’s Titanic: Meet Your Iceberg


Here's that iceberg that is drifting toward our economy's Titanic... and no, it ain't a virus, but it is our choice:

Via: @Schuldensuehner

Years of easy credit, easy money. The pile of debt from Baa to lower ratings is the real threat here, for its sustainability is heavily contingent on two highly correlated factors: cost of debt (interest rates) and availability of liquidity. The two factors are closely correlated, but are also somewhat distinct. And both are linked to the state of the global economy.

There are additional problems hidden within A and even Aa rated debt, since these ratings are vulnerable to downgrades, and current Aa rating shifting to Baa or Ba will entail a discrete jump in the cost of debt refinancing and carry.

7/2/20: Mapping Real Economic Debt: BRICS


Some great charts on real economic debt, via IIF, with my highlighting of the BRICS economies:

First off, mapping corporate debt and government debt as a share of GDP:


 China is an outlier within the BRICS group when it comes to corporate debt.

 Chart above shows how dramatic has been deleveraging out of FX-denominated debt in Russia over the last decade. Much of this came from the reduction in US Dollar-denominated exposures.


Lastly, the chart above showing changes in the US Dollar-denominated debt quality (by corporate ratings). Again, Russia is a positive stand-alone in this, with more positive outlook than negative outlook corporates - a trend strikingly different from both the Emerging Markets overall, and for other BRIC economies.

16/5/19: Identifying Debt Bubble 4.0


Having just posted on the debt supercycle-related comments from Gundlach (https://trueeconomics.blogspot.com/2019/05/16519-gundlach-on-us-economy-and-debt.html), here is a chart identifying these super-cycles in the U.S. economy:


The periods of significant leverage in the U.S. economy have been identified as follows:

  • First, I took nominal GDP growth rates (q/q) snd nominal total non-financial debt growth rates (also q/q) for the entire period of data coverage for which all data points are available (since 1Q 1966). 
  • Second, I adjusted nominal non-financial debt growth rates to reflect the evolving ratio of debt to U.S. GDP.
  • Third, I subtracted adjusted debt growth rates from nominal GDP growth rates to arrive at change in leverage risk direction. This is the difference figure shown in the chart below. Positive numbers reflect quarters when GDP growth rate exceeded growth in GDP-ratio-adjusted debt and are periods of deleveraging in the economy, and negative periods correspond to the situation where GDP growth rate was exceeded by GDP-ratio-adjusted growth rate in debt.
  • Fourth, I calculated 99% confidence interval for historical average difference (shown in the chart below).
  • Fifth, I identified three regimes of debt evolution: Regime 1 = "Deleveraging" corresponds to the Difference variable being non-negative (periods where the gap between growth rate in GDP and growth rate in debt is non-negative); Regime 2 = "Non-significant leveraging up" corresponds to periods where the gap (difference) between GDP growth rate and debt growth rate is between zero and the lower bound of the confidence interval for historical average difference; and Regime 3 = "Significant Leveraging up" corresponds to the periods where statistically-speaking, the negative gap between growth in GDP and growth in debt is statistically significantly below the historical average.
I highlighted in the above chart four periods of significant, persistent leveraging up, identified as Debt Bubbles 1-4. There is absolutely zero (statistical) doubt that the current period of economic recovery is yet another manifestation of a Debt Bubble. And, given the composition of the debt increases since the end of the Global Financial Crisis, this latest Bubble is evident across all three components of non-financial debt: the households, corporates and the U.S. Federal Government. 


24/2/19: Eurozone’s Corporate Yields are not quite in a crisis territory… yet…


Euro area high yield corporate credit rates are under pressure to continue moving:


But they are far from being dramatic, even though banking sector margins have now surpassed ex-crises averages:


The problem, however, is what awaits on the horizon. So far, the ECB is planning on hiking rates in the second half of 2019. If it does, with one 25 bps hikes to the end of 2019, we are looking at high yield rates jumping close to a 7 percent mark:


That is a bit more testing than the current above-the-average yields.