IMF sounds alarm over £7trillion Covid borrowing binge

COMPANIES took on an extra £7trillion of debt last year in a corporate borrowing binge that has prompted fears of a fresh banking crisis.

Firms turned to loans to see them through the pandemic as they had to shut their doors and the global economy slumped.

Now the International Monetary Fund (IMF) has said rising levels of bad debt, and a decreased appetite from banks to lend, could cause a ‘legacy of vulnerabilities’. In the UK, firms have borrowed over £75bn under Government-backed loan schemes since the pandemic began.

According to the Institute of International Finance, companies around the world borrowed around £7trillion last year, taking total corporate debt to £107trillion. Covid has punched holes in the finances of many small firms and in larger businesses in hardhit sectors such as hospitality and travel, the IMF noted.

Many companies are still on the brink of collapse, and could cause huge losses for banks if they fail to repay loans.

Last year, the UK’s major banks booked tens of billions of pounds in expected bad loans as they predicted pandemic struggles.

In most countries, these losses shouldn’t pose a direct risk to banks, the IMF said, since lenders built up larger cash buffers following the financial crisis to protect them from such risks.

But the IMF said there was the risk that banks could pull back on vital lending when Government support is withdrawn.

In its Global Financial Stability Report, the IMF said: ‘The phasing out of support policies could have a significant impact on some banks, likely weighing on their appetite for lending.

‘Moreover, for most banks, uncertainties about credit losses and weak prospects for profitability are likely to discourage significant reduction in capital buffers to support the recovery.’

The IMF has suggested that businesses should be assessed on the likelihood they will be able to continue after the pandemic.

Those with a future should continue to receive more targeted support, it said, while others should be wound up quickly.

It is also concerned that high levels of debt could weigh on future economic activity, as companies focus more on repaying the loans than expanding and investing. In the UK, the Government has made it easier for struggling companies to access cash by providing guarantees to banks who lend out money under statebacked programmes.

The IMF said countries should try to keep targeted support in place for firms which need it, while helping businesses which have already taken on eye-watering debt to pay it off.