Of Special Interest
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- Barclays/Cebr report challenges nation to think differently about wealth
- Fifth of UK investors looking to debt investment, new research reveals
- Regtech will play a more important role in PSD2, says Mitek
- Banks turn to Fintech partnerships to improve customer experience, finds Fraedom
- New industry code to tackle fraud must deliver, says Which?
- New TTF report highlights loss of trust in financial services
- Arxan highlights financial app vulnerability epidemic
- SAS asks whether banks really need to choose between operations and innovation
- Which? raises alarm as almost 1,700 free ATMs become fee-charging
- Financial wellness affects half of peoples’ mental or physical health, finds report
- Study finds traditional financial institutions embrace Fintech disruption
- Grass is greener for environmentally friendly businesses, finds Barclays
- Prospective homeowners would consider a 40-year mortgage to escape renting, finds Santander
- Millennials’ needs are changing the face of banking industry, says new report
- FS is putting consumer data at risk by failing to protect mobile apps, says Arxan
- A lack of belief in their ability holds 28% women back in work, says Cambridge & Counties
- ‘Which?’ reveals Scotland has lost over a third of its bank branches in eight years
- Next downturn unlikely to be as bad as 2008, according to S&P
- FCA reveals findings from first cryptoassets consumer research
- US consumers favour single mobile app for banking and payments
- Banks suffering major IT shutdowns every day, ‘Which?’ reveals
- The US will be a key offshore centre in 2019, says GlobalData
- Debit industry changes markedly in 10 years of the Debit Issuer Study
- UK's ‘Big Five’ face ‘too big to compete’ as small challengers secure stellar returns
- Banks as vulnerable now as before crash, says new study
- Leverage ratio a constant conundrum for European and US banks, says SNL
15th March 2019
Next downturn unlikely to be as bad as 2008, according to S&P
The stage is set for another global credit downturn, but the next crisis, if any, is unlikely to be as dramatic as in 2008-2009. While global debt levels are higher than a decade ago, contagion risk is lower. That's according to a special report published by S&P Global Ratings, titled: "Next Debt Crisis: Will Liquidity Hold?"
The report discusses the latest trends in the credit cycle and opines on whether we are heading for another full-blown crisis. To come to its conclusions, S&P compared the debt-related metrics of corporates, governments, and households with those recorded during the 2008-2009 global financial crisis. This special report is part of the "When The Credit Cycle Turns" research series, which started in 2018.
Total global debt has surged by about 50 per cent since the last global financial crisis, led by major-economy governments and Chinese non-financial corporates, while global debt-to-GDP ratios have risen to more than 231 per cent, compared with 208 per cent in June 2008.
Despite higher leverage, the risk of contagion is mitigated by high investor confidence in major Western governments' hard currency debt. The high ratio of domestic funding for Chinese corporate debt also reduces contagion risk, because S&P believes the Chinese government has the means and the motive to prevent widespread defaults.
In looking at nearly 12,000 corporates globally, S&P found the proportion of companies having aggressive or highly leveraged financial risk profiles has risen slightly, to 61 per cent. The higher risk is partly driven by Chinese corporates, which now make up about two-fifths of debt S&P categorises as aggressive and highly leveraged.
While S&P believes contagion risk is lower than in 2008-2009, risks are elevated. Due to extremely low interest rates, the past decade has seen a migration of investor flows into speculative-grade and non-traditional fixed-income products. These markets tend to be less liquid and more volatile, and could seize in the event of a financial shock or panic.
Even within the investment-grade arena, there is also now a much higher issuer concentration in the 'BBB' rating category, with issuer ratings trending down globally over the past decade.
Other risk areas include derivatives, exchange-traded funds, private debt, leveraged finance and certain types of infrastructure. About 80 per cent of leveraged loans outstanding are now "covenant-lite" – indicating protection for investors has decreased – and this is up from 15 per cent a decade ago.
While default risks have been low in recent years, this could change as money costs increase and global economic growth tapers. S&P economists recently revised their assessment of the risk of a US recession in the next 12 months to 20 per cent-25 per cent, from 15 per cent-20 per cent late last year.
S&P Global Ratings analyst Alexandra Dimitrijevic said: "A perfect storm of realised risks across geographies and asset classes could trigger a systemically damaging downturn. This downside scenario reflects an increased reliance on global capital flows and functioning secondary market liquidity."