(Corrects debt rise to show it is "by $740 billion," not "to
$740 billion" in paragraph 2)
By Douwe Miedema
WASHINGTON, April 9 Large debt piles at
companies are rendering emerging economies more fragile because
they could quickly transmit trouble to banking systems in a
crisis, the International Monetary Fund said on Wednesday.
Debt at risk of not being repaid by companies that have
already borrowed heavily could increase by $740 billion, rising
to 35 percent of the total, the Fund found in a model test
simulating a severe crisis.
"Debt at risk ... is even higher now than in the period
following the September 2008 collapse of Lehman Brothers, and it
is well above pre-crisis levels in Asia and in emerging Europe,
the Middle East, and Africa," the IMF said in its Global
Financial Stability Report.
The study, which comes out twice a year, described a number
of threats to the global economy as countries recover from the
credit crisis and aim to wean themselves from the cheap cash
central banks have pumped into their economies.
The share of weak firms after the shocks was the highest in
Argentina, Turkey, India and Brazil, where they could account
for more than half of all the firms, the IMF said, using a
sample of 15 countries for its test run.
Banks in Hungary, India, Indonesia, Malaysia and South
Africa had the lowest provisions for loan losses and might need
to raise additional shareholder capital if their borrowers
default on their loans, the report said.
Banks also depended too much on funding their business
through short-term debt rather than deposits, particularly in
Latin America and in emerging economies in Europe, a known risk
in case of a sudden investor scare.
In the United States, companies have been able to issue debt
at easier terms than in the past, with so-called covenant-lite
and second-lien loans on the rise just as they were before the
financial crisis. A usual risk premium of 30-35 basis points for
covenant-lite loans had disappeared, the IMF said.
U.S. bank regulators issued guidelines to banks last year to
limit their risk-taking for so-called leveraged loans - risky
loans that pay a high yield and that are commonly used by
private equity firms to finance acquisitions.
Another risk the IMF found was that more people were now
invested in corporate bonds via mutual funds and exchange-traded
funds. In the past, banks used to hold a high inventory of these
bonds, but new rules now make that harder.
The IMF said the risk of a fire sale in credit markets is
higher, because it is easier for retail investors to sell loans
if something spooks them and they all decide to shed investments
at the same time.
In the euro zone, it said, banks were still burdened by
non-performing loans after the currency bloc's sovereign debt
crisis. Policymakers should also find ways for companies to
become less dependent on their banks for credit, the IMF said.
It called on officials to make it easier for life insurers
and pension funds to lend to small- and mid-sized businesses
that have a hard time securing credit from banks, and ease the
way for firms with a poor credit rating to list bonds.
(Reporting by Douwe Miedema; Editing by Andrea Ricci)