US Debt Swells In Battle Against COVID-19 — And Bumps Lie Ahead

In girding for battle, it’s critical to stock up on supplies, on weapons.

To that end, in the United States, nonfinancial business debt surged in the first quarter as companies took on funding to grapple with the mounting effects of the coronavirus.

In a report Thursday (June 11), the Federal Reserve said firms tapped loans and issued corporate bonds in the first quarter at an annualized 18.8 percent rate. That pace is leagues above the 2 percent annualized pace that had been seen in the previous quarter and the sharpest surge since record-keeping began in 1946.

The total outstanding debt of these companies stood at $16.8 trillion at the end of the quarter, and that tally was greater than the total household debt outstanding, which in turn was up 3.9 percent in the quarter. Federal debt gained 14.4 percent.

At the same time, U.S. household net worth slipped by 5.6 percent to just under $111 trillion. That drop came as the stock market swooned. But then again: what goes up and goes down may go up again. Household wealth measurement is volatile, simply because so much of what that metric is based on is volatile in nature.

All told, U.S. domestic debt was up by 11.7 percent to $55.9 trillion in the quarter, as noted by CNBC.

The debt binge came as a recession took root in the U.S. (though it takes some time to realize we’ve been in a recession, looking backward at two quarters of declining economic activity). As announced by the National Bureau of Economic Research, a recession began in February.

Taking on such high levels of debt leaves companies and individuals exposed to higher interest payments, which in turn means that margins are pressured if 1) top lines or cash flow doesn’t return and 2) there is less room for reinvestment down the road.

There may be rumblings of what’s to come, presaged on the Continent.

Reuters reports that European Central Bank officials are drafting plans to address what might be hundreds of billions of euros in unpaid loans. Two unnamed sources told the newswire that one option is to create a “bad bank” that would “warehouse” unpaid euro-denominated debt. Under that plan, the bad bank, with the European Stability Mechanism as guarantor, would issue bonds to commercial banks. The commercial banks would buy the bonds in exchange for portfolios of unpaid loans, according to Reuters.

The stage was perhaps set for a debt reckoning even before the pandemic hit. As Jerry Flum, CEO of CreditRiskMonitor, told PYMNTS back in March, balance sheets were already highly leveraged. As he recounted back then, bond debt, not counting loans, held by public companies represented 48 percent of GDP, and total debt outstanding (public and private) represents multiples of GDP.

“That’s a record,” he told PYMNTS, “and a lot of it is junky corporate debt. The quality of debt has come down over the last several years because the governments of the U.S. and around the world suppressed interest rates.”