Is America on brink of next economic crisis?
Moody’s Analytics’ chief economist Mark Zandi is sounding the alarm over a surge in corporate debt among a concentrated group of U.S. corporations.
Zandi suggests that the debt burden mirrors the subprime lending spike, which eventually led to the 2008 economic crisis and breakdown of the nation’s financial services market.
“It is much too early to conclude that non-financial businesses will end the current cycle in the way subprime mortgage borrowers did the previous one. Even so, while there are significant differences between leveraged lending and subprime mortgage lending, the similarities are eerie," the economist stressed.
The continuing expansion of leveraged loans may derail the nation’s current economic growth. While analysts and corporates alike remain optimistic, Zandi said that the leveraged loan market is one area in which concerns are not overstated, MarketWatch reported.
Recent increases in federal interest rates mean investors should be watching corporate borrowers carefully. According to reports, the Federal Reserve’s “tightened monetary policy” created a boom in demand for loans issued by non-investment grade companies. Today, the leveraged loan market is now worth an estimated $1.4 trillion - more than the junk bond market. Altogether, businesses stand with approximately $2.7 trillion in debt.
Zandi noted that the subprime mortgage market, at the root of the 2008 economic crisis, was worth $3 trillion at its height. But Zandi noted that, so far, U.S. corporates have not overburdened themselves with debt, and heightened borrowing is a natural response to economic growth.