Is a Credit Crisis Looming? | The Corona Correction | Refinitiv
Welcome to the Corona Correction Series in association with Refinitiv, I'm your host Roger Hirst. One of the early concerns as the Corona Crisis started to build momentum was its impact across global credit markets. U.S. corporate debt-to-GDP was already at record levels with a huge swathe of investment-grade sitting in the lower tiers, only a couple of notches off junk. And in Europe, many of the sovereigns within the eurozone had only just started to recover from the effects of the debt crisis that posed an existential threat to the currency union in the early years of the last decade. I spoke to John Dioufas, Refinitiv's Director of Macro and Economics, to see if he thought that a credit crisis could be on the horizon. I don't want to use the word credit crisis, but there is definitely a developing credit story unfolding in the markets as we see that companies have basically in many respects... not in many respects, let's say in most respects, companies have seen their revenues decline dramatically. But they've got a fixed cost, right? So there is definitely a story as to what the debt of these companies looks like. So there is a credit story that's unfolding, and one of the really interesting stories last week was quite unexpectedly Fitch, they downgraded Italy's credit rating, which dramatically led to a widening in the spreads between the Italian 10 Year and the German Bund, the German 10 Year, and also the U.S. 10 Year Treasury Note. So I think going forward we're going to see as the countries that have been impacted hardest by Corona start to spend money, start to borrow money, we might see more of an unfolding credit story both at the sovereign level and at the corporate level. But that's a developing story, I don't really have a view as to how many countries or companies might be impacted, but I see that's one of the underlying themes at the moment in the markets. If you look at obviously the oil story, we are still very much an energy intensive society, whether we be a developed market or an emerging market. And there is the glut of oil, that sort of supply, or oversupply of oil that took place at the start of February coincided with a lockdown. And we see now that oil prices have come off, and I think that's a very interesting story as well to keep track of. As companies do their best to manage costs, we see one of two things happening. One is where companies are potentially talking about laying people off, so there's an employment / unemployment story unfolding there. But we're also seeing companies try something a little bit different where they're encouraging their staff to work from home. I think it was yesterday or this morning Twitter announced that it's expecting its employees to work from home and it used the term 'forever'. So there is a definitely an impact there in terms of real estate. So that's potentially something that's happening as well. Although John didn't say that we were currently in a credit crisis, he highlighted a number of headwinds that could tip certain sectors or regions over the edge. Many indebted companies now have margin issues because revenues have dropped whilst fixed costs haven't. And this could lead to a reluctance to re-hire, which could be a drag on future consumption. In the U.S., the energy sector is one of the largest within the high yield universe, and lower oil prices are already pushing some of these companies into bankruptcy. In Europe, Italy's debt remains a problem exacerbated by the eurozone's inability to form a coherent policy to help its member states. The E.C.B. is providing support for both corporate and government bonds, but a recent ruling by the German Constitutional Court has once again highlighted that there may be limitations on the extent to which the central banks can take control. We'll see you later with another update.