Finance

Sale signs inside the Bath and Body Works store in Edmonton. On Thursday, January 6, 2022, in Edmonton, Alberta, Canada.
Artur Widak | Nurphoto | Getty Images

Check out the companies making headlines before the bell Thursday.
Walmart – Shares of the retail giant rose more than 1.5% in premarket trading after the company raised its full-year forecast and reported an almost 8% gain in sales for the fiscal first quarter, pointing to strength in its large grocery business that helped offset weaker sales in clothing and electronics. Walmart also reported stronger-than-expected adjusted earnings and revenue, according to Refinitiv.

Take-Two Interactive Software — The video game company surged 14% after posting better-than-expected revenue for its fiscal fourth quarter. Take-Two Interactive shared a weaker-than-expected outlook, but signaled that a strong future gaming slate could fuel strong growth thereafter.
Bath & Body Works — The retailer of body care and fragrance saw its stock surge nearly 10% in premarket after the company posted stronger-than-expected earnings and revenue for the latest quarter. Bath & Body Works also raised its full-year earnings guidance.
Boot Barn — The western footwear brand shed more than 13% before the bell. Boot Barn reported fiscal third-quarter revenue and guidance that fell short of Wall Street’s expectations.
Cisco Systems — Shares of Cisco Systems lost 4% after the company reported a 23% decline in orders for the fiscal third quarter.
Regional bank stocks — Shares of many hard-hit regional banks stocks rose before the bell, building on Wednesday’s gains. PacWest, Western Alliance and Zions Bancorporation gained 7%, 3.9% and 1.3%, respectively. The SPDR S&P Regional Banking ETF added more than 1%.

Alibaba — The Chinese e-commerce company lost 1% after posting mixed results for the recent quarter. Revenue fell short of Wall Street’s expectations. Alibaba also said it plans to list its cloud division.
Micron Technology — The memory chipmaker’s stock rose 2% on news that it plans to make a multibillion-dollar investment in Japan to foster dynamic random access memory chip production there.
Synopsys — Synopsys added 2% after reporting better-than-expected quarterly results. The software company also shared stronger-than-expected revenue and earnings growth guidance for the full year.
Sony — The stock added nearly 4% after the company announced it will begin assessing a partial spin-off of its financial services business. Sony would list shares of Sony Financial Group in about two to three years and still own about 20% of the business.
— CNBC’s Yun Li, Tanaya Macheel and Michelle Fox contributed reporting More

Like slide rules and martini lunches, the London interbank offered rate (libor) was once a fine idea. In 1969 Iran’s central bank was looking for an $80m loan—at the time a hefty ticket for a high-risk country without the foreign-exchange reserves to cover it. So Minos Zombanakis, their banker, clubbed together a syndicate of banks which would each lend some of the money. But what interest rate to charge? Inflation was rising and rates were volatile; no bank wanted to lend at a fixed rate in case that left them out of pocket.Zombanakis’s solution was libor. Every interest period, each bank would report its cost of borrowing. The average of these, plus a spread for profit, would be the loan’s interest rate. If the lenders’ costs rose from period to period, so would their income. The idea took off—and with it, the market for syndicated loans. By 1982 this market was worth $46bn and mostly pegged to libor. Derivatives, home loans and credit cards followed. By 2012 libor set the rates for contracts governing some $550trn, more than seven times global gdp. Yet ever since then libor has been on the decline. Next month its final few fixings, for dollar lending, will be switched off for good. Its downfall was triggered by scandal: in 2012, it emerged that banks, brokers and traders had spent years manipulating the benchmark for profits. This prompted record-breaking fines, arrests and a loss of faith in the world’s most important number. But a deeper reason for libor’s demise is that today’s financial system makes the benchmark look as dated as the cigar smoke and mahogany panels that attended its birth. During the global financial crisis of 2007-09 the interbank-lending market that libor was meant to measure all but evaporated. It never returned to anything like its former depth as banks looked to more reliable funding sources. And so in 2017 regulators finally called time, warning firms to prepare for libor’s cessation.The benchmarks replacing libor are more suited to 21st-century finance. With one for each of libor’s five currencies, they are something of an alphabet soup. There is the secured overnight financing rate (sofr) for the dollar, the sterling overnight index average (sonia) for the pound, the Tokyo overnight average rate (tonar) for the yen, the Swiss average rate overnight (saron) for the Swiss franc and the euro short-term rate (€str) for the euro.What they all have in common is that they measure borrowing costs on large numbers of actual transactions, rather than trusting conflicted bankers to reply honestly to a subjective survey. Two of them—sofr and saron—report rates in the repo market (for secured loans collateralised by government bonds) rather than for bank deposits. This reflects the financial system’s shift from bank lending to disintermediated, market-based finance.In theory, then, libor’s alternatives make more sense. In practice, adopting them has been a long and rather tortuous slog. Dixit Joshi, formerly treasurer at Deutsche Bank, a German institution, compared its complexity unfavourably to that of Britain’s exit from the European Union. Contracts on hundreds of trillions of dollars, plus the computing infrastructure used to trade and monitor them, had to be renegotiated for a situation many had never envisaged. For dollar-libor, this meant extending the original cut-off date from the end of 2021 (when fixings for other currencies ceased) to this coming June.Even now, some $74trn of contracts use dollar-libor and expire after the deadline. There will be no more extensions. America’s Congress has passed a bill allowing the Federal Reserve to intervene in contracts and switch them from libor to sofr if they lack alternatives. (The contracts’ counterparties can prevent this if they agree.) Zombanakis himself, now dead, would have been unlikely to object. “We took it for granted that gentlemen wouldn’t try to manipulate things like that,” he told Bloomberg journalists in 2016, referring to the libor scandal. “But as the market was getting bigger, you couldn’t trust it…There’s just too much money involved.” ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

China’s youth represent just a sliver of the country’s working-age population and an even narrower share of its workforce. Many of those aged 16 to 24, after all, are still in school or university and therefore not seeking employment. In recent years, their job prospects have nonetheless compelled attention and raised alarm. Last month, overall unemployment in China fell from 5.3% to 5.2%, according to figures released on May 16th. This improvement was overshadowed by a rise in youth unemployment to 20.4%, the highest recorded since the data began 2018.The enormous attention paid to issues like youth unemployment is a symptom of China’s emerging “confidence trap”, argue Xiangrong Yu of Citigroup, a bank, and his colleagues. Even as the country’s economic recovery largely surpassed expectations in the first three months of the year, investors seemed to focus on its “weak links”. These included lacklustre imports, soft inflation, the failure of manufacturing to match the strength in services—and jobless youngsters. Foreign investors have soured on China as geopolitical tensions have risen: on May 17th the yuan slid past seven to the dollar. But “pessimism is also significantly prevalent and persistent on the domestic side”, the Citigroup economists note.It is evident in China’s stockmarkets, which have given up many of their gains from the initial reopening rally. And pleasant surprises in the economic data have barely registered in eeyorish fixed-income markets: government bond yields are only a bit higher than they were in the depths of the covid-19 pandemic. Although consumer confidence looks healthier than last year, it remains far below levels in 2019.China’s uneven recovery has so far failed to lift the mood. The danger now is that the mood will sink China’s recovery. In April, for example, credit grew surprisingly slowly. Retail sales, though strong compared with April last year, when Shanghai and other big cities entered lockdowns, were weak compared with professional forecasts (see chart). Industrial production also fell short of analysts’ expectations.Investment by state-owned enterprises was reasonably strong, but spending by private enterprises was only 0.4% higher in April than a year earlier, according to Oxford Economics, a research firm. Part of the explanation for this disappointing growth can be found in China’s property market, where a nascent recovery now appears to be in doubt. At the urging of the government, developers have prioritised completing unfinished building projects, rather than investing in new ones. Housing starts fell by more than 20%, even as completed floorspace grew by almost 19%.The weakness in the property market has prompted some economists to reduce their growth forecasts for the year. Ting Lu of Nomura, a bank, cut his figure from 5.9% to 5.5%, for example. “The recovery has stalled,” he explained, “due partly to Beijing’s inability to boost confidence among consumers and business investors. As disappointment kicks in, we see a rising risk of a downward spiral.”China could seek to revive the recovery and confidence by easing monetary policy more forcefully. Inflation fell to only 0.1% in April, leaving plenty of room for stimulus. But since China’s official growth target for this year is only 5%, the government may not rush to the rescue. Foreign investors and Chinese consumers do not have great faith in China’s recovery this year. The government’s unambitious growth target, set in March, suggests it does not have great confidence either. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

There exists a centuries-old and fathoms-deep relationship between finance and the state. The great banking houses, such as the Medicis of Florence, were lenders of last resort to rulers at risk of being overthrown. Financiers had to avoid backing losers, who would be unable to repay debts. Now it is banks that threaten to bring down the state; a switch that has led to more and more oversight from official organs. Things shifted sharply a century ago, with intervention in the Depression. The global financial crisis of 2007-09 reinforced the trend. Recent turmoil has pushed the banking system further along the path to state control. On May 11th the Federal Deposit Insurance Corporation, an American regulator, revealed that the country’s big banks face a bill of $16bn for losses associated with the failures of Silicon Valley Bank (svb) and Signature Bank. They will probably have to kick in even more to cover the fall of First Republic, another lender. In America, Britain and Europe, officials are debating if they should offer more generous protection for bank deposits. Such moves are just the latest evidence of the diminution of banks’ power and the increase in that of the state. Over the past few months, in areas from deposit insurance to emergency lending to regulation of asset quality, Leviathan has grown ever more dominant. Bankers and regulators are well aware that changes introduced in a time of turmoil have a habit of sticking around. Andrew Haldane, formerly of the Bank of England, has compared the safety-net provided to banks to “over-stretched elastic”. Once inflated, it never quite shrinks back to size. Moreover, potential future expansions in the state’s remit—possibly including much tighter rules on collateral or an unintended shift to a so-called narrow-banking system—can now be glimpsed. How much further will the state expand?To understand the dynamic at play, start with deposit insurance—which President Franklin Roosevelt is often credited with inventing. In fact, he resisted the measure’s introduction in 1934, fearing it would “lead to laxity in bank management”, since an insured depositor need not worry about safety. Although other countries, fearing the same, were slow to introduce such insurance, it nevertheless spread, typically introduced at times of crisis. This spring American regulators went further than ever: retrospectively protecting depositors in svb, Signature Bank and, in effect, First Republic. The president, treasury secretary and chairman of the Federal Reserve have all more or less said that all deposits in banks are safe.Emergency lending is the next area where the state’s role is growing. Banks need a lender of last resort because they are inherently unstable. Deposits are redeemable on demand; loans are long-term. Thus no institution will have money to hand when depositors clamour for it en masse. Walter Bagehot, a former editor of The Economist, is credited with advising that, to avoid a crisis, central bankers should lend freely to solvent institutions, secured by good collateral and at a penalty rate of interest. The Fed’s recently introduced “bank term funding programme” discards this dictum. It values long-term securities at par even when the market has heavily discounted them, and imposes hardly any penalty above the market rate of interest. The bigger the backstop, the more reason the government has to dictate what risks banks may take. Therein lies the third source of creeping state control: regulation of asset quality. Banks everywhere are subject to rules that restrict the riskiness of their assets and govern how much capital they must hold. The real risk comes when policy preferences interfere with lending rules. In America this already happens in the mortgage market, which is dominated by two government-backed enterprises: Fannie Mae and Freddie Mac. Together the two institutions now underwrite credit risk for more than half of mortgages. Their guarantees enable the 30-year fixed-rate, prepayable mortgages Americans have come to expect. They also help explain why America’s financial system bears more interest-rate risk than Europe’s, where floating-rate mortgages are common.On the houseSince Fannie and Freddie take on credit risk themselves, they charge mortgage originators “points” (as in percentage points), which vary with a borrower’s credit score and the loan-to-value ratio on a property. The system is arbitrary for borrowers, with those on the wrong side of dividing lines hammered. And sometimes the arbitrariness is fiddled with for reasons other than perceived risk. On May 1st new rules were put in place by the Federal Housing Finance Agency, raising the cost for high-score borrowers and cutting it for their low-score peers. The ambition was to make it easier for poor people to buy a home. Quite apart from the fact that easier credit does little, in aggregate, to make housing affordable, the government has in effect mandated that these institutions should not be properly compensated for the risk they take on. More of the banking system is coming to look like housing finance. After the global financial crisis, regulators hugely increased the stringency of rules governing bank balance-sheets. Different assets attract different risk-weights, meaning that what a bank chooses to invest in affects its overall minimum-capital requirements. Like any attempt to categorise complex things, these risk-weights will often be wrong. The loanbook of First Republic, which collapsed on May 1st, carried mortgages for the rich that had little credit risk, yet the rules assigned them a high risk-weight. Probably for this reason, regulators promised to share credit losses with JPMorgan Chase as part of its purchase of the loans, resulting in a lower risk-weight. It is not that anyone expects large losses. The government just had to circumvent its own misfiring rule.Where next for state intervention? In addition to expanding deposit insurance, the likely response of regulators to the recent turmoil will be to tighten rules on interest-rate risk. Today’s regulations allow banks to count the par value of government bonds of any duration as top-quality liquidity (ie, funds that are accessible in a crisis). As so many banks have learned in recent months, these bonds fall sharply in value when rates rise. The safest assets are both government-issued and short-term. Yet the more super-safe short-term government securities banks are instructed to hold, the more the industry would move away from its basic principle: that the point of banking is to transform short-term deposits into long-term assets.To some, this would be a good thing. Narrow banking, in which institutions are required to hold sufficient liquid assets to back all their deposits, was first proposed in 1933 as the “Chicago Plan”, after the devastation of the Depression. Already some parts of the system look narrowish. In 2013 money-market funds were given access to the Federal Reserve’s reverse-repo facility, in which they receive securities overnight in exchange for cash—a facility that was expanded during the covid-19 pandemic. In effect, Americans can park cash in money-market funds, which in turn park it directly at the Fed, circumventing the banking system altogether. Money-market funds have been on the receiving end of some $435bn in inflows since svb failed, a cash-flow that is helping destabilise banks. Another way in which the system could become more narrow is if the Fed or other important central banks launch central bank digital currencies, which operate as alternatives to bank accounts.Such a world would bring its own problems. Deposits are not useful sitting idle. The benefits of linking savers, who prefer safety and liquidity, with borrowers, who like flexibility and security, are big. Joseph Schumpeter, an economist, wrote in the 1930s that it was “one of the most characteristic features of the financial side of the capitalist evolution to ‘mobilise’ all, even the longest maturities”, so that they are financed by short-term borrowing. “This is not mere technique. This is part of the core of the capitalist process.” Banks liberate investment—an engine of Schumpeter’s creative destruction—from the “voluntary abstinence routine of the savers”.An alternative path might be to conclude that in a world of superfast bank runs, like the scramble that brought down svb, emergency support from central banks needs to become more common. Sir Paul Tucker, formerly of the Bank of England, who helped write rules introduced after the financial crisis, recently told the Financial Times that banks should stand ready to offer the central bank enough collateral to fund emergency loans covering all their deposits, such that they could survive a total run. This would bring into sharp relief another method by which the state controls banks: the list of assets it deems to be eligible as collateral for emergency loans. Banks would be able to use deposit financing only to hold assets that carried a government stamp of approval. Whichever path is chosen, the world is moving towards a bigger role for the government and a smaller one for private actors—a fact that should alarm anyone who values the role of the private sector in judging risk. In China and Vietnam state sanctioning of credit creation is explicit. The largest banks are majority-owned by the government, and state lenders are bound to prop up sclerotic state enterprises or turbocharge growth when governments deem fit. It is getting harder to spot the differences between the Chinese system of explicit direction of lending and the “social contract” of the Western system, in which there is massive state underwriting of risks and a mass of regulation foisted on banks in return, so that they do not abuse the insurance they have been granted. What is more, the seeds of many banking crises have been laid by misguided government intervention in banking, particularly by those moves that skew incentives or the pricing of risk, warns Gary Cohn, formerly second-in-command at Goldman Sachs, a bank. It might be easier to sleep at night knowing that, at present, the government has all but promised to protect all deposits, has lent generously to banks clinging on and has infused the system with funds through its wind-up operations. But this is precisely the kind of action that will cause sleepless nights in future. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Apple, Alphabet, Amazon and Microsoft are all up over 30% year-to-date. Facebook parent Meta has seen its stock soar more than 101% since the turn of the year.
This small pool of companies is diverging starkly from the broader market, with the Dow Jones Industrial Average up less than 1% in 2023.
Given the economic backdrop, Lait told CNBC’s “Street Signs Europe” on Wednesday that the market’s positioning was “rational” in the circumstances but “very shortsighted.”

Tech stocks on display at the Nasdaq. 
Peter Kramer | CNBC

The market’s affinity for Big Tech stocks this year is “shortsighted,” according to portfolio manager Freddie Lait, who said the next bull market phase will broaden out to other sectors offering greater value.
Shares of America’s tech behemoths have been buoyant so far in 2023. Apple closed Wednesday’s trade up almost 33% year-to-date, while Google parent Alphabet has risen 37%, Amazon is 37.5% higher and Microsoft is up 31%. Facebook parent Meta has seen its stock soar more than 101% since the turn of the year.

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This small pool of companies is diverging starkly from the broader market, with the Dow Jones Industrial Average less than 1% higher in 2023.
The gulf between Big Tech and the broader market widened after earnings season, with 75% of tech firms beating expectations, compared to a fairly mixed picture across other sectors and broadly downbeat economic data.
Investors are also betting on further rallies as central banks begin to slow and eventually reverse the aggressive monetary policy tightening that has characterized recent times. Big Tech outperformed for years during the period of low interest rates, and then got a major boost from the Covid-19 pandemic.
However Lait, managing partner at Latitude Investment Management, told CNBC’s “Street Signs Europe” on Wednesday that although the market’s positioning was “rational” in the circumstances, it was also “very shortsighted.”
“I think we are entering a very different cycle for the next two-to-five years, and while we may have a tricky period this year, and people may be hiding back out in Big Tech as interest rates roll over, I think the next leg of the bull market — whenever it does come — will be broader than the last one that we saw, which was really just sort of tech and healthcare led,” Lait said.

“You’ve got to start doing the work in some of these more Dow Jones type stocks — industrials or old economy stocks, to a degree — in order to find that deep value that you can find in otherwise great growth businesses, just outside in different sectors.”
Lait predicted that as market participants discover value across sectors beyond tech over the next six-to-12 months, the expanding valuation gap between tech and the rest of the market will begin to close.
However, given the strong earnings trajectory demonstrated by Silicon Valley in the first quarter, he believes it is worth holding some tech stocks as part of a more diversified portfolio.
“We own some of those technology shares as well, but I think a portfolio exclusively exposed to them does run a concentration of risk,” he explained.
“More interestingly, it misses out on a huge number of opportunities that are out there in the broader market: other businesses that are compounding growth rates at similar levels to the technology shares, trading at half or a third of the valuation, giving you more diversification, more exposure if the cycle is different this time.”
He therefore advised investors not to be roundly skeptical of tech shares, but to think about the broadening out of the rally and the “narrowing of the differential between valuations,” and to “pick their moments to get exposure.” More

Economics is full of equations named after their inventor. Robert Lucas, who died on May 15th aged 85, was different. His name graces something edgier: a “critique”. When he presented an early version, a young economist despaired: “You just explained why everything I’ve done in the last few years is worthless.”The Lucas critique can be explained with the help of an analogy—one he offered to students graduating from the University of Chicago, where he spent many years as both a student and professor. Imagine a fairground that sells tokens at the entrance for the rides inside, all of which are independently run. Suppose the cashier abruptly doubles the number of tokens per dollar. Fairgoers, flush with tokens, will flock to the rollercoaster, fun house and other attractions. Some ride operators will assume their rides are more popular than they thought. They might even extend workers’ hours in order to handle the additional custom.A statistically minded economist looking at the park’s data might conclude that an increase in the token supply leads to heightened activity and employment. They might even advise other fairgrounds to try the same trick. But of course this “policy” only works because ride-operators do not anticipate it. As they realise what is going on, they will raise the number of tokens they require per ride. Prices will rise and activity will return to normal.Lucas had been one of those statistically minded economists, busy documenting relationships between higher inflation and stronger employment in the giant fairground that is the American economy. Yet his critique showed that these relationships would crumble if policymakers acted on them. They were based on behaviour that would change if policy sought to exploit them. They could be tested but not tried. It was his most influential paper.He was not particularly proud of it. A critique by definition does not “fully engage the vanity of its author”, he noted. He and his intellectual comrades worked hard to give economists something more positive: less crumbly foundations to build on. Economists, he believed, “are basically storytellers, creators of make-believe economic systems”. So he and his colleagues built a fantastical new world for wonks to explore.Lucas had been thinking hard about “dynamics”, or how something like work effort evolves over time, and how views of the future affect it today. He thought of his parents: his father welding in Seattle shipyards; his mother painting adverts in “pure white, glossy black and elegant greys”. Both worked extra hard during the war, because they expected wages to be lower when it was over.How do people arrive at these views of the future? In early work, Lucas assumed firms would expect prices to stay much the same. That assumption allowed him to predict industry’s capital spending. But investments would predictably change future prices. The price expectations in the model were at odds with the price predictions of the model. To Lucas this seemed inconsistent. Instead, Lucas adopted the “rational expectations hypothesis”. He assumed the actors in his models would expect what the model itself predicted. If an economist can foresee that extra tokens will raise ride prices, then operators should expect the same.“Rational expectations” were not the same as flawless foresight. The future was uncertain. Thus Lucas assumed markets existed for present, future and merely possible goods, allowing people to strike deals over contingencies. He borrowed the framework from other theorists. But his own life provided the best example. His ex-wife had planned for the contingency that he might one day win the Nobel prize. Their divorce agreement in 1989 promised her half of the potential $1m award. When he won six years later, that contingent claim was fulfilled. “A deal’s a deal,” Lucas remarked.With the assumption of rational expectations, Lucas felt he had “eliminated the main intellectual basis” for fiscal and monetary fine-tuning of demand. After all, cashiers could not systematically fool ride operators. “Keynesian economics is dead,” he reported in 1979. That report proved exaggerated. Keynesians made a comeback, rejecting his policy presumptions, but embracing many of his methodological choices. These Keynesians provided a new intellectual basis for active macroeconomic policy in a recognisably Lucasian world, albeit one painted in greys, not pure white and glossy black. Later in life Lucas acknowledged that economists of all stripes, Keynesians included, had contributed to the successful stabilisation of spending flows in the post-war period. Yet to him, the gains to any further taming of the business cycle—stabilising growth even more tightly around its trend—seemed trivial compared with the gains to increasing that trend. His mind turned to the mechanics of growth. “The consequences for human welfare involved in questions like these are simply staggering”, he wrote in 1987. “Once one starts to think about them, it is hard to think about anything else”. To think hard about something, for Lucas, was to model it. Abstraction was a necessary prelude to clarity. He once received a laconic note from one of his co-authors, Ed Prescott. “This is the way labour markets work,” it said, followed by a single, cryptic equation that Lucas could not immediately understand. He could have asked Ed. He did not. Theorists, he said, do not ask for words to explain equations; they ask for equations to explain words.Never a dragMaybe so. But his own sparkling words represented a counter-example to this notion. Other economists were keen to hear as many of them as possible. In his work on human capital, Lucas had pointed out that apprentices pay their mentors indirectly, by accepting a lower wage to hang around them. Some of his colleagues paid a different sort of price. Robert Barro once hung a sign in his office that said: “No smoking, except for Bob Lucas”. It was worth inhaling his smoke to ingest his ideas. The Lucas critique bears his name; the whole of macroeconomics bears his mark. ■Read more from Free exchange, our column on economics:A new world order seeks to prioritise security and climate change (May 11th)How Japanese policymakers ended up in a very deep hole (May 4th)Economists and investors should pay less attention to consumers (Apr 27th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

The IIF said the combination of such high debt levels and rising interest rates has driven up the cost of servicing that debt, triggering concerns about leverage in the financial system.
“At close to $305 trillion, global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly,” the IIF said.

HIROSHIMA, JAPAN – MAY 17: People walk beneath a banner promoting the Group of 7 (G7) summit at a shopping street on May 17, 2023 in Hiroshima, Japan. The G7 summit will be held in Hiroshima from 19-22 May. (Photo by Tomohiro Ohsumi/Getty Images)
Tomohiro Ohsumi | Getty Images News | Getty Images

The global debt pile grew by $8.3 trillion in the first quarter to a near-record high of $305 trillion as the global economy faced a “crisis of adaptation” to rapid monetary policy tightening by central banks, according to a closely-watched report from the Institute of International Finance.
The finance industry body said the combination of such high debt levels and rising interest rates has driven up the cost of servicing that debt, triggering concerns about leverage in the financial system.

Central banks around the world have been hiking interest rates for over a year in a bid to rein in sky-high inflation. The U.S. Federal Reserve earlier this month lifted its fed funds rate to a target range of 5%-5.25%, the highest since August 2007.
“With financial conditions at their most restrictive levels since the 2008-09 financial crisis, a credit crunch would prompt higher default rates and result in more ‘zombie firms’ — already approaching an estimated 14% of U.S.-listed firms,” the IIF said in its quarterly Global Debt Monitor report late Wednesday.
The sharp increase in the global debt burden in the three months to the end of March marked a second consecutive quarterly increase following two quarters of steep declines during last year’s run of aggressive monetary policy tightening. Non-financial corporates and the government sector drove much of the rebound.
“At close to $305 trillion, global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly: Despite concerns about a potential credit crunch following the recent turmoil in the banking sectors of the U.S. and Switzerland, government borrowing needs remain elevated,” the IIF said.

The Washington, D.C.-based organization said aging populations, rising health care costs and substantial climate finance gaps are exerting pressure on government balance sheets. National defense spending is expected to increase over the medium term due to heightened geopolitical tensions, which would potentially affect the credit profile of both governments and corporate borrowers, the IIF projected.

“If this trend continues, it will have significant implications for international debt markets, particularly if interest rates remain higher for longer,” the report noted.
Total debt in emerging markets hit a new record high of more than $100 trillion, around 250% of GDP, up from $75 trillion in 2019. China, Mexico, Brazil, India and Turkey were the largest upward contributors.
In developed markets, Japan, the U.S., France and the U.K. posted the sharpest increases over the quarter.
Banking turmoil and a ‘crisis of adaptation’
The rapid monetary policy tightening exposed frail liquidity positions in a number of small and mid-sized banks in the U.S. and led to a series of collapses and bailouts in recent months. The ensuing market panic eventually spread to Europe and forced the emergency sale of Swiss giant Credit Suisse to UBS.
The IIF suggested that corporations have undergone a “crisis of adaptation” to what it termed a “new monetary regime.”
“Although recent bank failures appear more idiosyncratic than systemic — and U.S. financial institutions carry much less debt (78% of GDP) than in the run-up to the 2007/8 crisis (110% in 2006) — fear of contagion has prompted significant deposit withdrawals from U.S. regional banks,” the IIF said.

“Given the central role of regional banks in credit intermediation in the U.S., worries about their liquidity positions could result in a sharp contraction in lending to some segments, including underbanked households and businesses.”
This contraction of credit conditions could particularly affect small businesses, the IIF said, along with causing higher default rates and more “zombie firms across the board.”
Zombie firms are companies with earnings that are sufficient to allow it to continue operating and pay the interest on its debt, but not to pay off the debt, meaning any cash generated is immediately spent on debt. The company is therefore “neither dead nor alive.”
“We estimate that around 14% of U.S. companies can be considered zombies, with a substantial portion of these in the healthcare and information technology sectors.” More

Check out the companies making headlines in extended trading.
Take-Two Interactive Software — Shares jumped 8.1% Wednesday during after hours trading. The video game company reported $1.39 billion in adjusted revenue in the fiscal fourth quarter, topping analysts’ estimates of $1.34 billion, according to Refinitiv. Meanwhile, the company’s estimates for bookings in the first-quarter and full-year missed Wall Street’s expectations.

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Boot Barn Holdings — Shares of the cowboy boot company tumbled almost 16% after revenue fell short of analysts’ expectations for the fiscal fourth quarter. Boot Barn reported earnings of $1.51 per share, excluding items on revenue of $425.7 million. Meanwhile, analysts polled by FactSet had expected earnings of $1.44 per share and $441.2 million in revenue. The boot retailer’s full-year guidance also fell below analysts’ estimates.
Synopsys — The software company’s stock gained 1.9% Wednesday evening. Synopsys’ fiscal second-quarter earnings and revenue came above Wall Street’s expectations, according to FactSet. The company reported $1.4 billion in revenue, while analysts had estimated $1.38 billion. Synopsys also reported an earnings beat of $2.54 per share, excluding items, topping analysts’ estimates of $2.48 per share. Synopsys also raised its full-year guidance for earnings and revenue growth.
Cisco Systems — Shares dipped nearly 4% despite the company reporting an earnings and revenue beat for the fiscal third quarter. Cisco posted adjusted earnings of $1 per share and $14.57 billion in revenue. Analysts had estimated 97 cents earnings per share and $14.39 billion in revenue, according to Refinitiv. More