Next downturn unlikely to be as bad as 2008, S&P says
HONG KONG - The stage is set for another global credit downturn, but the next crisis, if any, is unlikely to be as dramatic as in 2008-2009, according to S&P Global Ratings, which says that, while global debt levels are higher than a decade ago, contagion risk is lower.
S&P compared the debt-related metrics of corporates, governments, and households with those recorded during the 2008-2009 global financial crisis.
"Global debt is certainly higher and riskier today than it was a decade ago, with households, corporates, and governments all ramping up indebtedness," said S&P Global Ratings credit analyst, Terry Chan.
"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."
Total global debt has surged by about 50% since the last global financial crisis, led by major-economy governments and Chinese non-financial corporates, while global debt-to-GDP ratios have risen to more than 231%, compared with
208% in June 2008, he says.
"Despite higher leverage, the risk of contagion is mitigated by high investor confidence in major Western governments' hard currency debt.
"The high ratio of domestic funding for Chinese corporate debt also reduces contagion risk, because we believe the Chinese government has the means and the motive to prevent widespread defaults.
"In looking at nearly 12,000 corporates globally, we found the proportion of companies having aggressive or highly leveraged financial risk profiles has risen slightly, to 61%.
"The higher risk is partly driven by Chinese corporates, which now make up about two-fifths of debt we categorise as aggressive and highly leveraged."
S&P Global Ratings analyst, Alexandra Dimitrijevic, said a perfect storm of realised risks across geographies and asset classes could trigger a systemically-damaging downturn.
"This downside scenario reflects an increased eliance on global capital flows and functioning secondary market liquidity."
The report says that, In absolute terms, among governments, the U.S. led the way by growing debt by US$10.6 trillion over the past decade.
China was next at US$5 trillion, with the Eurozone following, at US$2.8 trillion.