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As the health crisis leaves travel stalled, stores shut down, and businesses ailing, debt is mounting rapidly, with rising concern that borrowers will be left without the funds to follow up on loans and other owed payments.
In a recent report, Goldman Sachs said that economy-wide credit losses were likely, which will in turn lead to the devastation of creditors who depend on those payments, and an ultimate slide into financial insecurity across the banking sector.
This video will show you the next stage of the economic collapse that we are plunging towards. We’re going to discuss the meaning of the default cycle, the facts and figures behind how we’ve gotten to this point, and expert predictions of what will happen next.
In a healthy economic climate, when lenders are able to minimize risk and maximize profit, they become more willing to extend loans. When there is high access to credit, investments in real estate and businesses increase in value, and the risk of borrowing drops. As a result, corporate borrowers are able to repay what they owe without an issue. The benefits extend to an individual level as well, with people more willing to take out loans–money that they will then spend or invest–because funds are cheaper and their incomes are either stable or increasing.
Now however, with thousands of companies–including major names like JCPenney, J. Crew, and Hertz–declaring bankruptcy, and a steep spike in delinquencies, there is strong evidence that a default cycle is on its way. In fact, it has likely already begun.
Finance-driven capitalism has become more and more popular in recent years, and companies like American Airlines, Hertz, and Staples have all borrowed heavily to finance acquisitions and stock buybacks, among other things. According to figures from the Federal Reserve Board, the total debt of non-financial corporations rose from $6.1 trillion to $10.1 trillion within the last ten years.
Since 2011, nonfinancial corporate debt has jumped by over 60 percent. As a share of GDP, it recently hit record highs. Such elevated numbers for corporate debt inevitably signal a following wave of corporate defaults. To make matters worse, because revenue streams have dried up as a result of lockdowns and stay-at-home orders, companies are left scrambling to deal with negative cash flow. Oftentimes, this forces them into bankruptcy declarations that will, at best, force widespread restructuring, and, at worst, close their doors for good.
Goldman Sachs cautioned that this downturn will not mimic all aspects of the financial collapse of 2008. Whereas that event largely affected the real estate market, the pandemic has not showed such discrimination. Industries across the board have been devastated by consumers’ inability and unwillingness to spend, as well as the significant added health risks in day-to-day operations. Furthermore, the pandemic has affected some parts of the United States more than others, leading to discrepancies in how companies and industries are able to operate from one state to the next.
Still, some suffer more than others. Virus-exposed property types such as lodging and retail report significantly higher delinquency rates than less exposed property types such as self-storage, which can largely maintain normal operations.
In an analysis of which industries are most impacted by credit losses due to the ongoing health crisis, Goldman Sachs found that the energy sector is suffering the brunt of it, followed closely by travel and leisure, industrial goods and services, autos, real estate, and retail.
Sheer size and its preexisting tendency towards default risks puts the energy sector in a particularly difficult position. Its collapse is being fueled by the sharp contraction in oil demand, its disproportionately large footprint in the corporate bond market relative to its GDP share, and the significant amounts of leverage in the sector.
Experts at Goldman Sachs estimate that the 12-month trailing high-yield default rate will continue to climb until it reaches about 13 percent by the end of the year, near to the peak rate reached during the 2007-2009 financial crisis.
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