S&P: next global downturn ‘unlikely to be as bad as 2008’

A report from ratings agency S&P offered some succour on the widely debated topic of another global credit downturn, saying “the next crisis, if any, is unlikely to be as dramatic as in 2008-2009”.

In its report, ‘Next Debt Crisis: Will Liquidity Hold?’, S&P said that while global debt levels are higher than a decade ago “contagion risk is lower”.
To reach this conclusion, analysts examined the credit cycle trends and compared the debt-related metrics of corporates, governments, and households with those recorded in the 2008-2009 crisis.

Terry Chan, credit analyst at the ratings firm, said: "Global debt is certainly higher and riskier today than it was a decade ago, with households, corporates, and governments all ramping up indebtedness."

"Although another credit downturn may be inevitable, we don't believe it will be as bad as the 2008-2009 global financial crisis. That's because the increased debt is largely driven by advanced-economy sovereign borrowing and domestic-funded Chinese companies, thus mitigating contagion risk."
The report found that global debt has surged by about 50 percent since the last global financial crisis, with major-economy governments and Chinese non-financial corporates leading this trend.

Debt-to-GDP ratios around the world have increased to more than 231 percent compared with 208 percent in June 2008, the agency said.
It said that the risk of contagion of a crisis is “mitigated by high investor confidence in major Western governments' hard currency debt” and added that the high ratio of
domestic funding for Chinese corporate debt also reduces the risk of a financial crisis spreading, because the Chinese government has “the means and the motive to prevent widespread defaults”.

After analysing nearly 12,000 corporate organisations across the world, the report’s authors’ found that the proportion of companies with aggressive or highly leveraged financial risk profiles had risen slightly to 61 percent. Chinese corporates have driven this change as they now make up about two-fifths of debt S&P categorizes as aggressive and highly leveraged.

However, while crisis contagion risk is “lower than in 2008-2009, risks are elevated”, the report said. Analysts explained that extremely low interest rates over the past decade have caused investors to seek speculative-grade and non-traditional fixed-income products. Such markets “tend to be less liquid and more volatile, and could seize in the event of a financial shock or panic”.

The trend for lower issuer ratings in the past 10 years also means there are more issuers in the 'BBB' rating category, while derivatives, exchange-traded funds, private debt, leveraged finance and certain types of infrastructure all represent other areas of risk.

S&P said about 80 percent of leveraged loans outstanding are now "covenant-lite", which offer less protection for investors, up from 15 percent a decade ago.
Default risks have been low in recent years but as money costs increase and global economic growth tapers this could change. S&P economists recently revised their assessment of the risk of a U.S. recession in the next 12 months to 20 percent to 25 percent from 15 percent to 20 percent late last year.

Alexandra Dimitrijevic, analyst at S&P, said: "A perfect storm of realized risks across geographies and asset classes could trigger a systemically damaging downturn.
"This downside scenario reflects an increased reliance on global capital flows and functioning secondary market liquidity."

Other key findings showed that the US led the way among governments by growing debt by US$10.6 trillion over the past decade. China followed with a debt of US$5 trillion and the Eurozone at US$2.8 trillion.
This special report is part of the ratings firm’s research series "When
The Credit Cycle Turns", which began in 2018.

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