Instead of warning about the effects of this absurdity, they could just raise rates and quit buying bonds
Just two days after French luxury giant LVMH picked up Tiffany & Co. in a €14.7-billion deal, the Bank of France has warned that large French non-financial corporations, many of them part-owned by the state, have been taking advantage of years of low or negative interest rates to take on dangerous levels of debt.
Much of that debt has been used to buy up overseas companies and assets, the central bank warned in a report published in its November monthly bulletin.
Unlike some of their European peers, French firms’ net financial indebtedness (the total amount of debt minus available cash) has continued to rise since the 2008 financial crisis, reaching €3.6 trillion earlier this year, the equivalent of 143% of GDP, having increased more than 30 percentage points in 10 years. That was enough to earn the country eighth place on WOLF STREET’s leaderboard of the world’s most monstrous corporate debt pileups, just one notch below China in seventh.
The Bank of France’s warning is the latest in a series of dire warnings by central banks about the risks they themselves have created with their QE programs and interest rate repression, while simultaneously doubling and tripling down on QE and interest rate repression — much like a doctor might misprescribe a medicine, then, after the damage has been done, warn the patient about the dangers of taking that medicine, and yet for some reason continue to insist that the patient keeps taking the medicine.
Among the central banks that have issued warnings in the last past two weeks alone:
- The Federal Reserve cautioned that business debt levels are “high compared with either business assets or GDP, with the riskiest firms accounting for most of the increase in debt in recent years”. Around half of investment-grade debt outstanding is currently rated in the lowest category of the investment-grade range (triple-B) “– near an all-time high.”
- The ECB warned that “very low interest rates, coupled with the large number of investors which have gradually increased the duration of their fixed income portfolios, could exacerbate potential losses if an abrupt repricing were to materialize.”
- The German Bundesbank said that negative interest rates are encouraging banks in take on ever greater risks, expanding their lending to “relatively high-risk businesses” while simultaneously reducing their provisions. German lenders have also increased their exposure to the fast-growing domestic real estate market, while the Bundesbank considers house prices in many cities overvalued by 15% to 30%.
Now, it’s the turn of Banque de France to sound the alarm bells concerning the massive, unchecked rise of corporate debt in the country. The interest rate for lending to NFCs averaged 1.56% in 2018, its lowest level on record, according to S&P Global Ratings. This year, the ECB has cut its negative policy rate deeper into the negative. Small and midsize enterprises (SMEs) have used this opportunity to take out bank loans, while large companies have issued debt easily on the capital markets.
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