The International Monetary Fund (IMF) warned of threats to global financial stability, with debt burdens of big companies in China and other emerging markets one source of potential trouble.
In its latest Global Financial Stability Report, the IMF said the growing debt of giant companies in emerging economies is a big concern because of firms’ close ties to banks in those countries, as well as the national governments likely on the hook to bail them out, the Wall Street Journal reported.
In China, US$1.3 trillion of corporate loans, or one-seventh of the total, are owed by companies whose profits don’t cover their interest payments, the IMF was quoted as saying in its report released Wednesday.
That could trigger bank losses equal to 7 percent of gross domestic product if the issue isn’t addressed, the IMF said.
“Despite progress on economic rebalancing, corporate health in China is declining due to slowing growth and lower profitability,” the IMF’s top financial counselor, José Viñals, was quoted as saying.
Meanwhile, in Brazil and Russia, national champions have been hit by falling commodity prices and economic contractions.
“The sharp fall in commodity prices has exacerbated both corporate and sovereign vulnerabilities, keeping economic and financial risks elevated,” Viñals said.
The rising debt and slower growth in developing economies have helped boost the IMF’s measure of emerging-market risks nearly to the peak level of the 2008-2009 financial crisis, the Journal said.
Meanwhile, the total risk to global financial stability is estimated to be the highest in seven years.
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