There seem to be two flavors of pundit these days. There are those that assert that all the rules of debt and deficit and credit have altered to the point that we no longer have to worry about those pesky increases in debt–-not at the government level nor the corporate level or even at the consumer level. In contrast there are those that are breathlessly predicting an end to the world as we know it because the credit crash is coming and will gobble up all those zombie companies that have appeared in the last few years. The truth will be somewhere in between but it isn’t clear what direction it will tilt.
Today the level of corporate debt is the highest it has ever been-–more than $11 trillion (and the level of government debt is also at a record). It went up by a trillion last year alone due to the crisis imposed by the lockdowns. A “zombie” company is one that is not generating enough revenue to pay on its debt and most of these zombies will never be able to dig out of this mess. Even just a few years ago only one in ten listed companies were zombies and now it is one in four. The number of corporate borrowers that have “junk” credit is at an all-time high of 58% and that is up from 43% in 2004. Six of every ten corporate borrowers now have dubious credit.
The all-important question is whether this situation is a predictable result of a very deep and wholly unexpected recession that nearly wiped out the entire global economy or is a result of a long period of easy money policies put in place by the central banks. The optimists point out that revenues and profits are soaring again as life returns to some semblance of normal and that will allow some of these zombies to stagger back to life. The pessimists assert that it is too late and when credit gets more expensive and harder to get, the zombies will come crashing in a flurry of bankruptcies.