There is a growing corporate solvency crisis in most of the world, as balance sheets are hit hard by losses and the resulting need to pile up debt.
— Mario Draghi, former ECB Governor
(Group of 30 meeting, 14 December 2020)
Nonfinancial corporate leverage is high. We've been watching that. But, you know, rates are really low. And so companies have been able to handle their debt loads even in weak periods because rates are—rates are quite low. Your interest payments are low. Defaults and downgrades have declined since earlier in the year.
— Jerome Powell, Fed Chair
(Post-FOMC Press Conference, 17 December, 2020)
One of the key concerns being voiced by many financial market participants and some former central bankers today is the fear that a huge amount of debt has been taken on board in the years before and especially during the current pandemic. These companies are becoming increasingly insolvent, to the point where former ECB Governor Mario Draghi and Reserve Bank of India Governor Raghuram Rajan stated this week that they felt many companies are sitting on a solvency precipice. Conversely, Fed Chair Jay Powell took a more nuanced view with regard to the situation in the U.S.—one we would agree with.
In this Economics Weekly, we argue that while there has been a huge increase in debt in the United States, a major corporate debt event in the U.S. does not look likely in 2021, given the fundamentals currently underpinning the nonfinancial corporate sector.
For a copy of this report or to subscribe to the Economics Weekly or Economic Indicators reports, please contact your William Blair representative.
Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.