Corporate debt risky in global downturn – IMF

The International Monetary Fund (IMF) heightened its warnings for the corporate debt market on Wednesday, as investors search for richer returns in riskier assets after recent interest rate cuts by central banks.

The IMF, which meets with the World Bank in Washington this week, also warned the main drivers of downside risks to the global economy with ongoing trade tensions and policy uncertainty remaining.

A major geopolitical event – like the UK exiting the European Union without a new agreement in place – could trigger a sharp tightening of financial conditions, the IMF said in its bi-annual Global Financial Stability Report.

The IMF and other economic policymakers have expressed concern over high levels of risky corporate debt in the past.

But the group said on Wednesday that attempts by central banks worldwide to lower interest rates to combat immediate economic risks has exacerbated the situation, leading to “worrisome” levels of debt with poor credit quality and increasing financial vulnerabilities over the medium-term.

The IMF warned that 40% of all corporate debt in major economies could be considered “at risk” in another global downturn, exceeding levels seen during the 2008-2009 financial crisis.

The IMF warned that investors may be “overly complacent” about downside risks this late in the economic cycle.

On Tuesday, the IMF cut its 2019 global growth projection to its lowest level since the financial crisis, largely due to ongoing trade feuds.

The IMF singled out rising risks in corporate and nonbank financial sectors as a concern. Investors, facing lower interest rates, are taking on more illiquid investments with weaker investor covenants in search of higher rates of return.

The US Federal Reserve has cut rates twice in 2019 amid concerns that slowing global growth and trade tensions could spill over to the broader economy.

Meanwhile, central banks elsewhere, including the European Central Bank and Bank of Japan, have kept interest rates in negative territory in a bid to spur lending.

“The search for yield in a prolonged low interest rate environment has led to stretched valuations in risky asset markets around the globe, raising the possibility of sharp, sudden adjustments in financial conditions,” the report said.

The IMF also said policymakers “urgently” need to develop better tools to monitor risks in the corporate sector. –

Investors may be overly complacent about downside risks this late in the cycle