Global crisis looming, but ‘unlikely to be as bad as 2008’ – S&P

A global credit downturn is looming, but even it happens, it is “unlikely to be as dramatic as in 2008-2009”, according to a report from S&P Global Ratings.

While global debt levels are higher than a decade ago, contagion risk is lower, the report stated.

“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.”

According to the report, global debt has risen by about 50 per cent since the last global financial crisis, led by major-economy governments and Chinese non-financial corporates.

In absolute terms, among governments, the US saw the highest growth in debt by $10.6 trillion over the past decade, followed by China at $5 trillion, and the Eurozone, at $2.8 trillion.

A survey of nearly 12,000 corporates globally by S&P also found the proportion of companies having aggressive or highly leveraged financial risk profiles has risen to 61 per cent.

In particular, Chinese corporate indebtedness grew by two-thirds, to 155 per cent of GDP over the past decade.

Meanwhile global debt-to-GDP ratios have risen to more than 231 per cent, compared with 208 per cent in June 2008.

Despite higher leverage, the risk of contagion is “mitigated by high investor confidence in major Western governments’ hard currency debt”, the report said.

“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,” it added.

However, the risks are also elevated.

Due to extremely low interest rates, investor flows have moved to speculative-grade and non-traditional fixed-income products in the last 10 years.

“These markets tend to be less liquid and more volatile, and could seize in the event of a financial shock or panic,” S&P said.

Other risk areas include derivatives, exchange-traded funds, private debt, leveraged finance and certain types of infrastructure.

S&P’s economists recently revised their assessment of the risk of a US recession in the next 12 months to 20 per cent-25 per cent, up from 15 per cent -20 per cent late last year.

“A perfect storm of realised risks across geographies and asset classes could trigger a systemically damaging downturn,” said S&P Global Ratings analyst Alexandra Dimitrijevic.

“This downside scenario reflects an increased reliance on global capital flows and functioning secondary market liquidity.”