PETALING JAYA: The next global credit downturn, if any, is unlikely to be as bad as the crisis in 2008-2009, said S&P Global Ratings.
“The stage is set for another global credit downturn, but the next crisis, if any, is unlikely to be as dramatic as in 2008-2009. While global debt levels are higher than a decade ago, contagion risk is lower,” said the rating agency, with reference to a special report titled “Next Debt Crisis: Will Liquidity Hold?”
In the report, which discusses the latest trends in the credit cycle and opines on whether there will be another full-blown crisis, S&P Global Ratings compared the debt-related metrics of corporates, governments and households with those recorded during the 2008-2009 global financial crisis.
“Global debt is certainly higher and riskier today than it was a decade ago, with households, corporates, and governments all ramping up indebtedness,” said S&P Global Ratings credit analyst Terry Chan.
“Although another credit downturn may be inevitable, we don’t believe it will be as bad as the 2008-2009 global financial crisis. That’s because the increased debt is largely driven by advanced-economy sovereign borrowing and domestic-funded Chinese companies, thus mitigating contagion risk,” he said.
Since the last global financial crisis, total global debt has surged by 50%, led by major-economy governments and Chinese non-financial corporates, while global debt-to-gross domestic product ratios have risen to more than 231% compared with 208% in June last year.
Despite higher leverage, the risk of contagion is mitigated by high investor confidence in major Western governments’ hard currency debt.
“The high ratio of domestic funding for Chinese corporate debt also reduces contagion risk, because we believe the Chinese government has the means and the motive to prevent widespread defaults,” said S&P Global Ratings.
Following a study on nearly 12,000 corporates globally, the rating agency found that the proportion of companies having aggressive or highly leveraged financial risk profiles has increased slightly to 61%.
It noted that the higher risk is partly driven by Chinese corporates, which now make up about two-fifths of debt categorised as aggressive and highly leveraged.
While contagion risk is lower than in 2008-2009, S&P Global Ratings warned that risks are elevated.
“Due to extremely low interest rates, the past decade has seen a migration of investor flows into speculative-grade and non-traditional fixed-income products. These markets tend to be less liquid and more volatile, and could seize in the event of a financial shock or panic,” it said.
Even within the investment-grade arena, there is also now a much higher issuer concentration in the “BBB” rating category, with issuer ratings trending down globally over the past decade, it noted.
Other risk areas include derivatives, exchange-traded funds, private debt, leveraged finance and certain types of infrastructure. About 80% of leveraged loans outstanding are now “covenant-lite”, indicating protection for investors has decreased, and this is up from 15% a decade ago.
Although default risks have been low in recent years, S&P Global Ratings said this could change as money costs increase and global economic growth tapers.
The rating agency’s economists recently revised their assessment of the risk of a US recession in the next 12 months to 20-25% from 15-20% late last year.
“A perfect storm of realised risks across geographies and asset classes could trigger a systemically damaging downturn. This downside scenario reflects an increased reliance on global capital flows and functioning secondary market liquidity,” said S&P Global Ratings analyst Alexandra Dimitrijevic.
Source: The Sun Daily