By Eamon Quinn
The US business cycle is in its “boom phase” and firms have taken on “lots of debt”, a report by Moody’s on the credit markets has found.
And the ratings firm said US non-financial corporates, which now owe about $2.7tn (€2.3trn) will face pressures as sub-prime mortgage borrowers did a decade ago, as interest rates rose.
“It is much too early to conclude that nonfinancial businesses will end the current cycle in the way subprime mortgage borrowers did the previous one.
“Even so, while there are significant differences between leveraged lending and subprime mortgage lending, the similarities are eerie,” it warned.
It said strong US economic growth has driven wage and price increases and led the US central bank to hike interest rates.
Some of those characteristics were present before the great economic recession set in 10 years ago, but Moody’s believes that this time, household debt levels are under control.
“Another feature of the boom phase of a business cycle is excessive risk-taking somewhere in the financial system.
“This fuels the boom and is eventually at the centre of the subsequent bust.
“Sub-prime mortgage loans were the obvious culprit a decade ago, runaway internet stocks that pumped up a stock market bubble were the problem in the early-2000s recession, and the savings and loan crisis incited the early 1990s downturn,” it said.
“But this concern seems overblown. Household credit growth is consistent with income gains, and debt loads that had fallen sharply after the last recession show no indication of rising,” Moody’s said.
However, it warned about the high debts of companies.
“Considering the leveraged loan and junk corporate bond market together, highly indebted nonfinancial companies owe about $2.7tn,” Moody’s said, noting that subprime mortgage debt was close to $3tn at its peak before the crisis.
“Regulators are undoubtedly nervous — they issued guidance to banks to rein in their leveraged lending in 2013 — but an increasing amount of the most aggressive lending is being done by private equity, mezzanine debt, and other institutions outside the banking system and regulators’ purview,” it said.