Borrowing remains remarkably easy for a world carrying trillions in debt
In 2010, in the wake of the global banking crisis, 34 of the world’s richest nations – those that belong to the Organisation for Economic Cooperation & Development (OECD) – ramped up their borrowing to $10.9 trillion. In 2019, the OECD revealed last week, those same governments took their borrowing to a fresh high of $11.4tn.
The Paris-based thinktank says the new figure is a cause for worry, especially when those same governments have only managed to grow their national economies at a snail’s pace over the past 10 years. Without strong growth, debts become a bigger burden on government finances when things turn nasty, as they did 10 years ago.
The ratings agency S&P took a broader view of government debt last week, wrapping together the debts of all nations to arrive at a figure of $53tn. This year it expects governments to ask international investors for $8.1tn, which is 20% more than they wanted in 2015.
And those fears don’t stop at government debt. The OECD has spent the past couple of years warning about the colossal sums that corporations have borrowed.
In a separate assessment last week, it said non-financial businesses – that is, those outside the banking and insurance sector – issued $2.1tn in bonds. This is borrowing in addition to the overdraft facilities and bank loans these companies use to fund their activities.
The OECD said: “Adding the record borrowing during 2019 to the unprecedented buildup of corporate bond debt since 2008 means that the global outstanding stock of non-financial corporate bonds at the end of 2019 reached an all-time high of $13.5tn.”
Many of the companies borrowing funds on the international markets don’t need the cash. They have enough to invest in new equipment or processes – not that they do enough of that – and they generate enough cash to cover all their day-to-day expenditure. Instead, they are borrowing to pay ever-higher dividends to their shareholders.
Voracious investors, whether they are pension funds, big investment houses or sovereign wealth funds, want their dividends whether the companies they have put their money into make a bigger profit from year to year or not.
Disturbingly, the word from the OECD is that today’s stock of outstanding corporate bonds is closer to junk status than in any previous credit cycle.
Jamie Dimon, the boss of America’s largest bank, JP Morgan Chase, was asked at the World Economic Forum in Davos whether the level of corporate borrowing was a problem and he said it held no fears for him. But government debt? That was another matter.
Dimon, of course, makes a good profit from arranging corporate borrowing, and would be unlikely to bite the hand that feeds him. However, he rightly points out that governments are heading for trouble should inflation ever take off again and central banks jack up interest rates.
Lending to governments these days is mostly done by central banks, especially in Europe and Japan. The European Central Bank snaps up almost every bond that eurozone countries issue – so much so that Greece, once the pariah of the bond markets and forced to borrow at 40%, can now borrow at 1% less than the US government.
This makes borrowing an enticing answer to almost any problem that presents itself. That will be the case in a couple of weeks when Rishi Sunak stands up and says Britain needs a higher dose to satisfy its debt addiction.
At least he is likely to spend the funds on investment. But when the UK stands on S&P’s list as the third-largest debtor after the US and Japan (and ahead of Italy), Sunak would be wise not to be reckless.
British Steel needs a favour from France
British Steel is walking a tightrope and a decision by the French government, expected within days, could tip the balance.
The Chinese industrial giant Jingye has agreed in principle to rescue British Steel, paying £50m and promising to invest £1.2bn. A deal would dispel the black cloud hanging over 4,000 jobs and the Scunthorpe blast furnace, at risk since the company collapsed into insolvency last May.
But there is a sticking point – British Steel’s Hayange plant in northern France, which supplies the country’s vast rail network. During conversations with former chancellor Sajid Javid, his French counterpart, Bruno Le Maire, indicated Paris was not willing to let such an asset fall into Chinese hands.
Should Le Maire say “non” to the sale of Hayange to Jingye, it is unclear why the Chinese firm would proceed with the deal.
While Scunthorpe captures the imagination in the UK, Hayange may well be the jewel in the company’s crown. Unlike the business as a whole, it is thought to be profitable. It makes a wider variety of rail track than Scunthorpe, which gives it access to more markets around the world. The steel for the Crossrail project was manufactured in the UK but had to be rolled at Hayange.
Jingye wants to boost production at the UK site by half a million tonnes a year. But if it can’t send that steel to Hayange, it will need to find external buyers for the unfinished product.
The Brexit context is inescapable: Britain finds itself reliant on French goodwill just as it bids adieu to the bloc the two countries once shared. Should French assent not be forthcoming, it will be back to the drawing board. Buyers such as Turkey’s Cengiz Holdings claim to be ready to pick up the ball but that means starting the dealmaking clock all over again.Meanwhile, taxpayers continue to fund a government indemnity supporting British Steel’s £1m-a-day losses. The Treasury’s patience will not last forever, and time is running out.
Sniping about BP muddies climate waters
BP’s audacious ambition to become carbon neutral has positioned the oil giant less as a climate leader than a global lightning rod for its rivals, and for green campaigners.
Its aim to become a net zero company by 2050, which will require offsetting more emissions every year than are produced by the whole of the UK, emerged without a detailed plan or roadmap of interim targets on the way to an admittedly distant goal which lies almost a generation away. The lack of detail has not gone unnoticed by either environmental groups or BP’s fossil fuel peers.
Last week, Mark Cutifani, boss of mining giant Anglo-American, launched what was viewed by most as a thinly veiled attack on BP’s green plans, saying there were “too many people throwing stuff around” with regard to climate targets, and “many don’t understand, or aren’t committed to making the changes”.
According to him, it’s “all about what you do, not what you say you’re going to do”. Quite.
Glencore’s outspoken South African chief executive, Ivan Glasenberg, called BP’s climate aims “wishy-washy”, because the goals were “a long way out”.
This industry scepticism is damaging – not because it muddies the debut of new BP boss Bernard Looney, but because it devalues a vital shift in corporate strategy that all fossil fuel firms must undergo. BP’s ambition threatens to breed cynicism rather than inspire copycat progress.
Royal Dutch Shell has made clear that it has no intention of entering “an arms race of CO2 targets”, not least because it is focusing on its own interim emissions targets – targets BP has yet to set.
Shell is, at least, setting out a path towards emissions reductions. But critical words between fossil-fuel producers must not detract from the desperate need for action.
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