Central-Bank Forked-Tongue Syndrome.
All over the world, corporations have taken on huge piles of fresh debt to try to weather the crisis. Many of those companies — after years of interest rate repression that encouraged them to borrow — were already heavily indebted before the crisis began. This is particularly true of France, where corporate debt was growing at an annualized rate of 5.8% in February, before the virus crisis began, according to the Bank of France. In March, the rate of growth jumped to 7.1%. It then surged to 9.9 % in April.
Much of this new debt issued during the pandemic is guaranteed by the French state — to the tune of 70-80% in the case of large companies. Thanks to this support, as well as the ECB’s negative interest rate policy, corporate bond buying programs, and countless other interventions, that debt comes at minimal cost for most corporations.
The interest rates on French banks’ corporate loans averaged just 1% in April — the lowest level since 2003, according to French financial daily Les Echos. The yields on the bonds issued by French firms in April averaged 1.58%, significantly higher than the record low of 0.48% registered in August 2019 but a marked improvement on the 1.99% registered in March, when bond yields were soaring.
While debt is still relatively cheap for large French firms, despite the bleak economic panorama, the risks facing excessively leveraged companies are mounting, Bank of France (BdF) warned in its biannual financial risk report.
“The increase in corporate debt could hurt many (firms’) solvency and this risk could be made worse if the recovery is weak and their ratings deteriorate,” the central bank said. “A sharp increase in corporate bankruptcies could in turn increase banks’ non-performing loans, slowing the flow of credit necessary for the economic recovery.”
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Nick Corbishley 