Bank collapses are just the start of the world’s financial woes – indebted businesses will be next
- Decades of easy money have led to high levels of corporate debt worldwide and in Asia especially
- Now with the sharp rise in interest rates, businesses – particularly small and medium-sized firms that are the backbone of economies like Hong Kong – risk defaulting on their loans
The illusion that the consequences of financial excess can be bought off by ever-increasing monetary indulgence continues to dissipate, as is evident from recent bank runs. But the worst is yet to come. These bank runs will be followed by an epidemic of corporate bankruptcies, as sure as night follows day.
This is a particular hazard in Asia where levels of corporate – and in some cases household – borrowing have soared in recent years to match or even overtake government indebtedness.
The debt of global non-financial companies was US$88 trillion at the end of 2021 when it exceeded the value of global gross domestic product for the first time. It eased slightly in 2022 but since then things have taken a turn for the worse where dealing with the burden of debt is concerned.
This is because interest rates have surged over the past year from the near zero (and sometimes even negative) levels they were reduced to in the wake of the 2008 global financial crisis by central banks desperate to stave off a repeat of the Great Depression.
As the IMF noted in 2021, “Easy financial conditions in the aftermath of the Global Financial Crisis of 2008-09 have been a key driver of the rise in leverage in both advanced and emerging market economies.”
As veteran financial analyst Jesper Koll put it during a recent event that I moderated at the Foreign Correspondents Club of Japan in Tokyo, “Bad things happen when interest rates rise.” They do indeed.
Debt service costs rise – for households, corporate borrowers and governments. Mortgage payers can then lose their homes and businesses – small and medium-sized enterprises especially – face the risk of going bankrupt.
How is it that corporate executives and market analysts apparently fail to foresee the entirely predictable consequences of such developments? It often seems to be because they haven’t been around long enough to compare present events with past experience. They can’t see what’s coming.
Typical of this viewing of life through rose-tinted glasses, Nigel Green, head of asset manager deVere, observed that investors are increasingly convinced that looser monetary policies are on the way and, as a result, “want to build up their investment portfolios with new money”.
If this is true – and it probably is given the recent record of poor investor judgment – it only goes to show just how little understood are the consequences of central banks and politicians’ collective refusal to bear pain in the present to secure future financial health.
Subsequent financial system excesses led to the global financial crisis in 2008, followed by more monetary easing. Financial system collapse and global recession were averted but the weapon of choice to achieve this – a decade of historically low interest rates – created huge asset price inflation.
That it didn’t also cause runaway consumer price inflation was due to banks choosing to keep “easy money” in their current accounts with central banks rather than lend it out.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs