Looming Corporate Credit Losses Will Be Absorbed By Financial Institutions And Possibly Even By Taxpayers

Looming Corporate Credit Losses Will Be Absorbed By Financial Institutions And Possibly Even By Taxpayers

Banks for International Settlements An obsessive focus on stock market returns is lulling many investors and analysts into thinking that the worst of the current COVID-19 economic crisis is over. Before the pandemic struck, I expressed my concern about significantly leveraged non-financial companies in over forty pieces in Forbes. Eye opening research published by Bank for International Settlements economists, Benoît Mojon, Daniel Rees, and Christian Schmieder confirms my view that corporate insolvencies, bankruptcies, and credit losses to financial institutions are just starting to be felt. And as they wrote in "How much stress could Covid put on corporate credit? Evidence using sectoral data" published today, "the looming increase in corporate bankruptcies will generate credit losses that will need to be absorbed, either by the financial system or by taxpayers." Mojon, Rees, and Schmieder created a framework to translate sectoral macroeconomic scenarios into sectoral corporate credit losses, and applied it to the Group of 7 (G7) economies, China and Australia. Based on their sectoral GDP projections, the BIS economists found that "corporate credit losses during 2020-22 could be equivalent to about three times the pre-crisis level on average across the G7, China and Australia." These additional "credit losses emerging from the