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Corporate debt levels a threat to global financial system

By Philip Smith

IMF calls for end to trade tensions

Growing levels of corporate and emerging market debt – caused by ultra-low interest rates – are a threat to the global financial system, the International Monetary Fund (IMF) has warned.

It says $19 trillion (£14.9tr, €17.1tr) of company debt is “above crisis levels”, is at risk of default and poses the threat of global contagion, according to City AM.

The Guardian reports that the IMF said that almost 40 per cent of the corporate debt in eight leading countries – the US, China, Japan, Germany, Britain, France, Italy and Spain – would be impossible to service if there was a downturn half as serious as that of a decade ago.

A general global slowdown, heightened by the US-China trade war, has seen interest rates remain low for a long period. This, the IMF says, is encouraging unsustainable business borrowing.

These low rates have held down government bond prices and sent investors towards riskier assets such as non-financial firms’ bonds and shares and the debt of emerging market countries. The amount of money owed by companies and developing countries has rocketed.

Investors buying bonds of emerging markets such as those in Brazil, India and Mexico – which offer bigger returns – is leading to high levels of sovereign debt, the IMF said. “In the event of a sharp tightening in global financial conditions, increased borrowing could raise rollover and debt sustainability risks.”

It added that the main focus of governments should be bringing an end to the trade tensions which are the primary “downside risk” to the economy.

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