Tsunami of Debt– World Is $200 Trillion in Debt and Growing: Corporate Dilemma; Pile of Debt, Hoard of Cash…

Rising global debt is increasing the risk of another financial crisis… Debt is piling up around the world stifling global economic growth and heightening the risk of more defaults, market turmoil– global debt is about US $200 trillion…

According to McKinsey Global Report; the world is bloated with debt, its unsustainable… it’s a huge destabilizing factor, especially when interest rates begin to rise… With a global population of about 7.3 billion people this works out at over US $27,200 of debt for every man, woman and child alive in the world today… Globally, scariest figure is China’s debt, which has quadrupled since 2007…

According to ThomsonReuters study of over 1,400 companies; China has the world’s biggest corporate debt pile at US $16.1 trillion which is 160% of GDP and rising, and projected to climb 77% to US $28.8 trillion over next five years… and with a slowing economy this is potentially a great threat to global economic stability…

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According to Don Lee; world leaders are caught in a trap; more debt in the form of government and private spending is needed to stimulate today’s sluggish economies. Yet the higher the debt, the greater the danger that a pullback by creditors will trigger another financial crisis like the one in 2008… According to Olivier Blanchard; the post-crisis world is a world of high debt and it doesn’t take much for debt dynamics to go wrong…

In the U.S. many companies are taking advantage of a widely used tax-avoidance maneuver and face ticking clock: According to Andrew Chang; the aggressively friendly debt market is allowing companies to borrow instead of repatriate cash… According to Moody’s  Analytics; some $950 billion in cash is held offshore by the more than 1,100 non-financial companies… That accounts for more than half of the record US $1.64 trillion in cash held by the companies at year-end…

McKinsey Global Institute Report on World Debt: A sobering look at how little the world appears to have learned from the global recession and just how dangerous levels of sovereign and consumer debt have become… If you thought debt levels were alarming in 2008, consider where they are today; the widely anticipated ‘de-leveraging’ that was expected to be a natural result of the recovery process simply hasn’t happened…

Since 2007, global debt has not fallen, but has actually grown by US $57 trillion, raising the ratio of debt to GDP by 17 percentage points. Government debt accounts for just under half of the total, and is expected to continue to rise, reflecting a broad failure to rein in spending and embrace fiscal conservatism…

In 2000, global debt (i.e.; based on 2013 constant exchange rates) was US $87 trillion. By 2007 it had reached US $142 trillion, and by second quarter of 2014 had reached US $199 trillion (an increase of 229% in just 14 years, or 286% of global GDP)… According to McKinsey; Japan’s debt to GDP ratio is excess of 500%, Spain is excess of 400%, China’s is nearly 300%, and U.S. is 269% of GDP… Clearly, this is not sustainable.

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Global Corporate Credit by Standard & Poor’s Ratings Services: Total amount of outstanding corporate debt, including; existing, refunded and new debt, is expected to swell to US $71 trillion by 2019, overall global credit risk is expected to be moderate… Analysts expect US $37 trillion of demand to come from refinancing requests, along with US $20 trillion in new issuance… On a regional basis, analysts conclude; Latin America continues to suffer from the downturn in commodity prices, restraining debt growth in that market…

The Asia-Pacific region should experience faster corporate debt growth in Hong Kong, Singapore, Indonesia and especially India, which may more than double its total outstanding corporate debt to US $2.3 trillion over the next five years. Debt demand in the Eurozone may remain essentially flat, going from US $9.6 trillion in 2014 to US $9.7 trillion in 2019… The risks facing global corporate credit have evolved since Standard & Poor’s (S&P) published its first global borrowing forecast in 2012 when it estimated– new debt and refinancing at US $46 trillion through 2017…

Then market confidence increased in 2013, partly boosting the S&P five-year demand projection to US $53 trillion… Now the current revised forecast is US $57 trillion for 2015-2019…

U.S. Working Capital Annual Report by REL/The Hackett Group and CFO Magazine: U.S. corporate debt level is ‘alarming’, which suggests that the old adage ‘cash king’ is being replaced by ‘debt is king’… The study of ‘working capital’ performance of nearly 1,000 of largest U.S. public companies found that they continue to take on ‘alarming’ amounts of debt. Debt rose by over 9% in 2014 to nearly US $4.6 trillion with companies leveraging low interest rates to fund increased investment activities…

At the same time, companies made almost no improvement in ‘working capital’ management, and doing very little to generate cash internally by optimizing how they collect from customers, pay suppliers, manage inventory… Companies that doubled their debt or more since 2007 saw their ‘working capital’ performance worsen; while companies that decreased their debt over the same period saw a significant improvement… Cash on-hand decreased for the first time in a decade in 2014 largely due to expenditures on acquisitions… although it has risen by 74% since 2007 and currently it’s at US $932 billion, near its all-time high…

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In the article America’s Business Puzzle: Record Debt and Record Cash by Theo Francis and Ted Mann writes: Companies have been accumulating cash at a rapid clip; doubling it since 2007… Meanwhile, the debt taken on by non-financial companies reached a record US $9.6 trillion, up from US $6.5 trillion in 2007. This debt not only allows companies to keep profits untaxed overseas, it also generates interest that is used to generate tax deductions at the higher U.S. rate…

According to Calcbench Research firm; among more than 240 companies disclosing increases in un-remitted foreign earnings in 2013, those with bigger increases tended to also see bigger increases in corporate debt. Hence by borrowing in their home country, companies can do things, such as; buy-back stock… without a tax hit to bring offshore cash to the parent company.

Rising foreign cash holdings correspond  to a growing share of earnings derived from outside the borders as companies expand around the globe… Hence, low interest rates make it a feasible strategy to borrow against those untapped profits… According to Robert Sicina; since repatriation of earnings is an expensive proposition; borrowing against it is an alternative for businesses…

In the article Corporate Debt Rises To New Record by Jeff Cox writes: Corporate debt has intensified in 2014, with record levels of borrowing… According to Thomson Reuters; in 2014, companies have issued US $236.6 billion in investment-grade loans and the highest on record… According to Fed; corporate debt among non-financial companies has ballooned to US $13.6 trillion, increasing 7.1% in the fourth quarter…

Companies have put all that debt– which has increased from about US $11 trillion during the darkest days of the financial crisis in late 2008– to a number of uses, such as; boost share prices through buybacks… This combination of hoarding cash while continuing to raise debt, and not invest in growth has spurred concern about whether companies are using the low-rate opportunity wisely.

In the article Watch Out for Corporate Debt Bomb by Brett Arends writes: U.S. companies borrow at record levels; that’s a disaster waiting to happen… For the past five years, U.S. corporations have been living in a financial paradise: Interest rates have been on the floor; Wages have been flat; Companies have been able to slash costs; Profits are at record levels; And, very little spent on new capital equipment… Here is a comparison, according to U.S. Federal Reserve; in 2007, at the peak of the last credit mania, U.S. non-financial corporations owed US $7.2 trillion, whereas today its US $9.6 trillion…

All that talk you hear about how corporate balance sheets are in great shape is a bunch of hooey. Corporations borrowed US $993 billion just in the first quarter… Corporate debts have actually doubled since 1999. Yes during this time corporate assets have also gone up: Companies have built up some cash reserves (mostly offshore, to avoid taxes). But the overall picture is alarming; today U.S. non-financial corporations are carrying debts equal to 50% of their actual net worth. That is near record levels and far above historic averages…

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Companies are enjoying all the benefits of the recent economic boom… However, the addiction to debt and apathy toward true cash flow management is very disconcerting. According to Analisa DeHaro; today money is cheap, but there’s no question that interest rates will rise and when it happens, companies that are focused on optimizing ‘cash’ will be better positioned to– mitigate risk, fund investment, outperform peers… Clearly company debt is important; it’s healthy, it’s a natural precursor to create underlying conditions for growth, but too much debt can have opposite effect…

According to Daniel Wagner; the same ‘witches brew’ that ignited past global recession still exist… it seems very few lessons learned… Current debt levels are unsustainable and with fewer policy options, it’s only matter of time until the next fiscal crisis, and with the stock markets and asset prices once again at frothy levels; seeds for the next debt crisis may have already been sown…