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Threat of Corporate Debt Blowout Grows: Evidence from U.K.

June 5, 2017 (EIRNS)—EIR recently warned of a looming collapse of a corporate debt bubble in the United States, where corporate debt has shot up to double its size in just six years, has been used for "financial engineering" rather than capital investment, and is showing increasing signs of default.

The same threat exists in the United Kingdom, where a comparable corporate debt bubble is matched by a bubble of household debt which is not only of record size, but growing at a record rate. In both countries, economic growth, which might support the debt masses, is very slow.

The International Monetary Fund, in its Global Financial Stability Report, 2017, warned that a sharp interest rate rise in the United States would set off debt defaults of roughly 20% of all corporations, a tidal wave of debt collapse. But in the United Kingdom, according to a new report, just a one-quarter point rise in interest rates will set it off.

The June 5 London Times covered a report by the Association of Business Recovery Professionals, or bankruptcy experts. The Association is known generally as "R3." It’s report found that just a one-quarter-percent rise would trigger defaults by as many as 80,000 businesses, one in every 25. And this was rising rapidly; last September, R3 had found that just one in 100 companies would be knocked out by a quarter-point rate rise.

In addition, R3 found that 96,000 companies—about one in 20 across the U.K.—cannot repay their debt; "they are only able to paying interest on their borrowings."