The funny thing about debt is that lenders don’t care if the borrowers fell on hard times. They still want their money back, when promised. If they don’t get it, they often take the borrowers to court. But that’s the bargain that borrowers make when they take loans.
For companies who use debt to fuel growth, things are great as long as the economy is expanding. The loan payments remain flat even as corporate revenue and profits move higher. But when the economy sinks, it can be hard for companies to adjust to new circumstances because their debt payments don’t fall.
Which brings us to now.
Boston Federal Reserve President Eric Rosengren said that the huge increase in corporate debt in the years before the pandemic will likely keep a lid on the economic recovery. The problem is that the Fed helped create the issue. By holding interest rates at record-low levels to entice borrowing, the central bank urged corporations to take out loans, which are now one of the sources of their misery.
“Clearly a deadly pandemic was bound to badly impact the economy. However, I am sorry to say that the slow build-up of risk in the low-interest-rate environment that preceded the current recession likely will make the economic recovery from the pandemic more difficult.
“The increased risk build-up, such as the reaching-for-yield behavior in commercial real estate or increased corporate leverage, make economic downturns including this one more severe. These are issues that I and others spoke about quite extensively in the years before the pandemic hit, in particular with respect to questions about the need for accommodative interest rates when the economy was doing well, and the potential for a build-up of financial stability risks.”
Right. We messed this up. Hope it works out for all of you.
Unfortunately, the pain in the corporate real estate sector will be around for years due to changing work habits and empty buildings. It’s likely that current non-payments will eventually turn into foreclosures.