The debt of US nonfinancial businesses had already surged in recent years, but when the Pandemic hit, businesses went on a borrowing binge as the Fed has repressed interest rates to record lows even for the riskiest corporate borrowers.
These debts of nonfinancial businesses – including corporations and businesses that are not incorporated – jumped by 9.1% year-over-year to $17.7 trillion in Q4 2020, according to the Fed’s Financial Stability Report. This amounts to 82.4% of nominal GDP. The Fed has been ruminating in its financial stability reports about the risks posed by corporate debt.
China and the tax havens rule!
These debts are from nonfinancial businesses and exclude banks, nonbank lenders, insurance companies, and other lenders because lenders borrow and then lend, and including their debts would lead to some double-counting.
But what is happening in the USA pales compared to what is happening in some other countries, such as the corporate tax havens and financial centers of Luxembourg, Ireland, and Hong Kong, and of course in China, according to the data released today by the Bank for International Settlements (BIS) for Q4 2020. It leaves the USA in ignominious 22nd place!
The China Phenomenon:
And then there is China. In dollar terms, its business debt, as the economy grew rapidly during these 15 years, multiplied by a factor of 10, from $2.5 trillion in 2005 to $25 trillion in Q4 2020. And as a percent of GDP (all in local currency), its business debt soared from an already sky-high 105% in 2002 to 161% in Q4 2020 (green line).
In 2016, China’s authorities started to attempt to deleverage their largest and most indebted nonfinancial companies, many of them state-owned or state-controlled. This included taking apart some overleveraged conglomerates. These efforts produced some results, but reversed during the pandemic. The US nonfinancial business debt-to-GDP ratio (red line) shows just how out of whack China’s business leverage is:
The top three places in terms of the business-debt-to-GDP ratio are the corporate tax havens and financial centers Luxembourg (with business debt at an astounding 342% of GDP), which amounts to over four times the ratio of the USA (84%); Hong Kong (247%); and the favorite for US corporations, Ireland (190%). Many global companies are headquartered, sometimes on a mailbox basis, in these places, and some of their debts are registered there, though they were marketed to investors in other countries. Note the puniness of the US ratio (red line at the bottom):
4th to 6th Place: Sweden, France & Belgium:
Sweden and France have immensely indebted companies. The Bank of France has long lamented the risks associated with the indebtedness of the French giants, many of them partially state-owned. In Sweden, the business-debt-to-GDP ratio rose to 175.3%, in France to 171.1%, and in Belgium to 166%, still beating China.
8th to 10th Place: Norway (155%), Netherlands (152%), Singapore (141%):
They’re behind China (7th place) in terms of business debt to GDP. All charts below are on the same scale as the chart above for Sweden, France, and Belgium, ranging from 60% to 180%. Singapore is a major financial center:
11th to 13th Place: Switzerland (137%), Denmark (136%), Canada (132%):
14th to 16th Place: Finland (123%), Chile (116%), Japan (116%):
Japan’s businesses were deleveraging for about 25 years, following the blowup of the bubble in 1989. Their business debt to GDP bottomed out in 2016. But all along, they’ve outdistanced the US debt-to-GDP ratio:
17th to 19th Place: Korea (111%), Spain (108%), Portugal (103%):
Korean companies deleveraged for years coming out of the 1997 Asian Financial Crisis. Spain and Portugal deleveraged after the implosion of their enormous housing bubbles led to their own financial crises mixed in with the euro debt crisis. And the deleveraging hasn’t stopped yet. What happened in 2020 that caused their percentages to tick up was that GDP collapsed:
Finally, the USA, in 22nd Place. In 20th to 23rd Place: Austria (100%), Russia (93%), USA (84%), UK (80%):
In recent years, Russia’s corporate giants, many of them state controlled and big exporters of crude oil, gas, minerals, other raw materials, military equipment, and some other products have borrowed heavily in foreign currency and have moved Russia into 21st place, just ahead of the US:
