Which Is Scarier, Climate Change or CLOs?

Call it the Greta effect. Global finance titans gathered at the annual International Monetary Fund meetings in Washington this week identified climate change as a key risk to the long-term health of the world economy. It was one of the hot topics discussed, perhaps partly inspired by the teenage activist who has made saving the environment a cause celebre. But a more immediate concern within bankers’ wheelhouses was also prominent on their worry list: Record levels of corporate borrowings, tucked away in hidden pockets of the financial system, have the potential to do great damage.

The IMF warned that as much as $19 trillion of corporate debt — or nearly 40% of total borrowings by companies in major economies — may be at risk of default in the event of a severe economic slowdown. Since 2009, corporate speculative-grade debt as a percentage of gross domestic product has soared in China and risen in the U.S., and with rates low, investors have been taking on more risks to boost returns. While banks may not have much of this risky debt on their own books, 80% of non-bank financial institutions are now as vulnerable as during the global financial crisis, according to the IMF. That number is up from 60% in April.