Handelsblatt Warns of Financial Crash of U.S. Corporate Debt
May 8, 2017 (EIRNS)— Germany’s financial daily Handelsblatt published on May 5 a warning to Germany’s government and investors, of a global financial crash triggered by defaults in U.S. corporate debt.
The article, with the clever headline "Debt-ja vue all over again," summarized itself as follows:
"A surge in corporate loans, especially in the United States, could unleash a new global financial crisis. That should worry Germany, too, writes the head of Handelsblatt’s finance pages."
Handelsblatt states the global corporate debt growth universe first:
"It’s an enormous number: Companies worldwide took up $3.7 trillion (€3.37 trillion) in new debt in the capital markets last year. That ... exceeds the previous record for new corporate bonds. The last time a similarly high [relative] level was reached was in 2006—just before the beginning of the last major financial crisis.
"It is a loud warning signal. The contours of a giant bubble are becoming more and more apparent in the market for corporate bonds. It could burst in the coming years, due to rapidly rising interest rates and a declining economy. In parallel to the gigantic real-estate bubble of the previous decade, the United States could once again become the trigger and possibly the epicenter of the next crisis. And, once again, major German investors would be one of the many victims."
Handelsblatt blames the Federal Reserve’s and European Central Bank’s zero-interest and qualitative easing policies as a part of the financial crisis threat. By buying up, and driving large investment funds and banks out of, sovereign debt, the central banks drove them to take unprecedented loads of corporate debt at low rates, despite high risk. One resulting example is the huge German insurance group Allianz, which, Handelsblatt reports, now has "a portfolio of corporate bonds of more than €220 billion (nearly $250 billion), of which half have a medium to poor credit score from rating agencies."
Moreover, according to the Institute of International Finance (the big banks’ global lobby),
"Only 3% of companies in the United States and Europe invest the money from investors in things like machinery, buildings, IT systems and other long-term projects."
The other 97% has been used for various kinds of "financial engineering."
"In other words, the companies are getting more and more into debt merely to drive up their share prices in the short term. This trend is especially pronounced in the United States. There, the debt bonanza has led to the fact that today one-tenth of these companies cannot pay their interest burden with current profits— and this at a low key interest rate of 0.75 to 1%."
Let interest rates rise, writes Handelsblatt’s analyst Daniel Schäfer, and the bubble can easily blow up.
"Some would call this a farfetched theory, but unfortunately it is supported by many facts and warnings from renowned professionals."