Global economy faces $590 trillion storm

A $590 trillion storm threatens the global economy as rising interest rates make more corporate debts problematic. Bloomberg estimates that globally, there are $590 trillion worth of corporate loans and bonds in a distressed state, meaning they are at risk of not being repaid, and warns that this number is likely to increase further.

The wave of defaults is expected to impact economic growth rates and create tensions in the corporate bond markets, which are trying to recover from the biggest losses in decades.

The sector facing the most pressure is commercial real estate, as the slow return to offices after the pandemic leaves many buildings empty. Over a quarter of the distressed debt worldwide, amounting to $168 trillion is related to the real estate industry. Companies acquired by private equity funds during the era of cheap money are also at the center of the problems, burdened with large debts, often with variable interest rates. The interest rate hike is now affecting these companies just when the accuracy crisis is squeezing households' disposable income and, consequently, their profitability.

In the US, the amount of high-yield corporate bonds and low-rated business loans has more than doubled from $3 trillion in 2008 to $6 trillion in 2021, before the Fed began its more aggressive interest rate increases.

During the same period, the debts of Chinese companies (excluding the financial sector) surged relative to the country's GDP. In Europe, sales of junk bonds increased by over 40% in 2021 alone. Many of these bonds will have to be repaid in the coming years, as debts totaling $785 trillion mature. With China's growth slowing down and the ECB and the Fed expected to continue raising interest rates, these repayments may become unbearable for some businesses.

In America, the amount of problematic bonds and debts has already increased by over 360% since 2021. If it continues to rise, it could lead to the first major wave of bankruptcies since the global financial crisis.