ET OnlineJamie Dimon, chairman and CEO of JPMorgan Chase, the largest bank in the US, has flagged the possibility of interest rates climbing much higher as central banks try to get a grip on inflation. More grimly, he forecasts a breakdown of the forces that made money almost free in mature economies.
This is a scenario that companies, which have piled up unprecedented borrowings during a phase of cheap credit, are unfamiliar with, as a mountain of corporate debt comes up for renewal over the next couple of years.
Interest costs are already eating into profit margins, which should eventually show up in investment decisions. This will have a telling effect on China and India, which are providing the growth impulse to the world economy, but which also house large concentrations of companies with low interest coverage ratios, and, thus, susceptible to default.
India, specifically, is trying to build investment momentum with low corporate cash buffers that heighten vulnerability to rising borrowing costs. This is amplified by a high share of short-term corporate debt that could face extra pressure if credit conditions tighten. RBI has been overly cautious about quantitative tightening and has addressed emerging pockets of vulnerability. But food and fuel are keeping inflation above the desired trajectory, thereby piling pressure on credit costs.
The world now owes over four times what it produces, and the demand for debt is unlikely to abate as governments borrow more to cushion consumers against inflation, mitigate climate change and build infrastructure. Sustaining this debt will become more difficult as economies tip into recession.
This is likely to reshape the credit market as lending becomes more cautious and less productive debt is whittled down. Healthy corporate borrowers are likely to benefit from such structural shifts. This could play out emphatically in India where lending to companies is relatively concentrated. The top tier of corporate borrowers is reasonably deleveraged and ready to invest.
This is a scenario that companies, which have piled up unprecedented borrowings during a phase of cheap credit, are unfamiliar with, as a mountain of corporate debt comes up for renewal over the next couple of years.
Interest costs are already eating into profit margins, which should eventually show up in investment decisions. This will have a telling effect on China and India, which are providing the growth impulse to the world economy, but which also house large concentrations of companies with low interest coverage ratios, and, thus, susceptible to default.
India, specifically, is trying to build investment momentum with low corporate cash buffers that heighten vulnerability to rising borrowing costs. This is amplified by a high share of short-term corporate debt that could face extra pressure if credit conditions tighten. RBI has been overly cautious about quantitative tightening and has addressed emerging pockets of vulnerability. But food and fuel are keeping inflation above the desired trajectory, thereby piling pressure on credit costs.
The world now owes over four times what it produces, and the demand for debt is unlikely to abate as governments borrow more to cushion consumers against inflation, mitigate climate change and build infrastructure. Sustaining this debt will become more difficult as economies tip into recession.
This is likely to reshape the credit market as lending becomes more cautious and less productive debt is whittled down. Healthy corporate borrowers are likely to benefit from such structural shifts. This could play out emphatically in India where lending to companies is relatively concentrated. The top tier of corporate borrowers is reasonably deleveraged and ready to invest.
(Catch all the Business News, Breaking News, Budget 2024 Events and Latest News Updates on The Economic Times.)
Subscribe to The Economic Times Prime and read the ET ePaper online.
(Catch all the Business News, Breaking News, Budget 2024 Events and Latest News Updates on The Economic Times.)
Subscribe to The Economic Times Prime and read the ET ePaper online.
Get Unlimited Access to The Economic Times
