IMF warns of debt ‘timebomb’ thanks to ‘cheap money’ borrowing policies

THE International Monetary Fund warns that low interest rates are encouraging companies to take on a level of debt that could become a “timebomb”.

The IMF says the resulting debt — as much as £15tn — would be disastrous in the event of a global recession.

In a half-yearly financial market update, the IMF said that almost 40 percent of corporate debt in eight countries – the US, China, Japan, Germany, UK, France, Italy and Spain – could become impossible to service.

The stimulus from central banks encouraged firms to borrow beyond their capacity to pay it back, the report says. The Washington-based IMF believes the global financial system is “highly vulnerable”, and warns member states not to go down the path of the early 2000s. Share prices in the US and Japan are overvalued, and the credit spreads in bond markets are too low for the current state of economic affairs.

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‘The stimulus from central banks encouraged firms to borrow beyond their capacity to pay it back.’

IMF officials Tobias Adrian and Fabio Natalucci said corporations in the eight countries listed were taking on too much debt — and their ability to service it was faltering. Corporate debt at-risk could rise to £15tn, the pair said — almost 40 percent of total corporate debt in those economies.

Bank regulations have been tightened since the financial crisis of 2008, but the IMF says risk has been shifted to the corporate sector. It warns against “cheap money” policies and tax breaks on debt interest payments. Investors were being urged to take more and greater risks to achieve higher yields, with the possibility of instability and lower medium-term growth.

Some 70 percent of economies were adopting an “accommodative” stance, with a decline in longer-term yields — and interest rates were negative, the IMF said. Those negative yields from government and corporate bonds were worth trillions of pounds, according to the report.

Over the past six months, vulnerability among financial institutions not classed as banks — pension funds and insurance companies — had increased.

Systemically important financial sectors indicate a similar level to those at the height of the 2008 financial crisis.