The mountain of corporate debt will be the seed of the next financial crisis

14 November by Eric Toussaint

Less than ten years after the failure of Lehman Bros. in September 2008, all the conditions are once again gathered for another major financial crisis. Even though the Governments of the World’s principal economies had promised to establish financial regulations that would respect the general interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. and avoid new crises and their painful/ grievous consequences for the populations.

In order to defend this capitalist system that so nauseates public opinion soothing declarations announcing strong measures supposed to “clean-up” the system have multiplied, but nothing has really changed. In fact, the policies chosen by the governments and the central banks are very favourable to big capital, particularly the big financial corporations. Not one strict measure has seriously pressed the holders of capital to reduce their high risk practises or speculation, or invest in tangible production.

Crises are essential mechanisms in the capitalist system but they are not all alike. We do not intend, here, to do another analysis of the general causes of the crises of capitalism. Rather, to identify the factors which are certainly leading to the next great crisis. When it happens all the pundits, in governments, central banking and the mainstream press will pretend to be as surprised and even shocked, as they always do when bubbles burst.

To oppose the system it is fundamental to point the finger at those who are at the origins of the crises and to show how Capitalism works in order to impose different principles and to break radically away from the Capitalist system.

Since 2010, thanks to the policies of low interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
practised by the Central Banks of the most industrialised countries (Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank :
(The Fed) in the US, European Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.
), Bank of England, Bank of Japan, Swiss National Bank, among others), the big Corporations have become massively more indebted. In the US for example, corporate debt increased by $7,800 billion between 2010 and mid-2017.

What have they done with the money? Have they invested in research and development, in production, in the ecological transition, in creating descent jobs, warding off climate change? Not at all!

The money has been used principally for the following:

I. to buyback their own issued shares. This produces two advantages: 1) the share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. price goes up; 2) share holders can be remunerated and at the same time avoid paying taxes on profits. What is more, in some countries capital gains are taxed at low rates (compared to income tax or VAT). Already in 2014, buybacks of shares amounted to $40- $50 billion monthly. |1| The trend has continued since. It must be noticed that the same phenomenon happened previously as from 2003 and built up to a climax in September 2007 when the ’sub-prime’ crisis was at its worst. Between 2010 and 2016 North American Corporations bought back their issued stock to the tune of $3000 billion. |2| As the French financial daily Les Echos headlined, “Wall Street driven by record stock buybacks » |3|. The high quotation of stock market indexes, not only in the US, is the result of massive buybacks. Corporate stock market values are therefore totally artificial.

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Volume of buybacks by Standard and Poor’s (S&P) 500 index US Corporations between 1999 and 2017 in billions of dollars
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Dividends paid to shareholders between 1999 and 2017
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Comparing buybacks (in blue) and dividend payments (in green), between 1999 and 2017, with the movement of the of the S&P 500 share index over the same period (the red line). This index considers the 500 biggest US Corporations and S&P is one of the big three Credit Rating Agencies that quote country risk.
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S&P 500 Corporations’ use of cash reserves between 2000 and 2017. We notice an increase in buybacks and dividend payments between 2002 and 2007, then again between 2009 and 2017. In 2017 spending on buybacks and dividends amounted to 48% of cash reserves.

What corporations really do is borrow from banks to buy their own stock in order to increase the value of issued shares and increase the value of shareholders’ parts

In the imaginary capitalistic world of the economics text books Corporations issue shares on the stock exchange to raise money for productive investments. What they really do is borrow from banks to buy their own stock in order to increase the value of issued shares, increase the value of shareholders’ parts and give the impression that their corporation is in excellent health.

The acting directors who are remunerated in stock options, that is, shares in the company they direct and that they may eventually sell, benefit directly from the increased value of their stock. The lord helps those who help themselves. Let us note too that CEOs have been very generous. Between 2010 and 2016 US shareholders received $2000 billion. Added to the buybacks US shareholders made $5000 billion over those six years.

Meanwhile corporate balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. sheets show an increase in liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). pertaining to debt while shareholder equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. is proportionally reduced. Should interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates on corporation debt increase the payments may become unsustainable and lead to bankruptcies. Also, should the price of shares that are artificially buoyant fall sharply, this could also lead to bankruptcies.

Massive buying back by big North American Corporations such as Hewlett Packard (HP), IBM, Motorola, Xerox, Symantec or JC Penney, has no rational, economic, industrial, commercial or social advantages.

II. Corporations borrow to buy debt. They buy structured financial products made up of credits on other corporations or personal loans. They mostly buy corporate or public obligations. Apple alone, in 2017, holds $156 billion of corporate debt, about 60% of assets. |4| Ford, General Motors and General Electric hold a lot of corporate bonds Corporate bonds Securities issued by corporations in order to raise funds on the Money Markets. These bonds resemble government bonds but are considered to be more risky than government bonds and other guaranteed securities such as Mortgage Backed Securities, and therefore pay higher interest rates. . Ebay and Oracle assets are bonds of other companies to the tune of 80% and 75% respectively.

The thirty main US non-financial corporations Non-financial corporations All economic agents that produce non-financial goods and services. They represent the greatest share of productive activity. that act on the debt markets hold a total of $423 billion of corporate debt and commercial paper securities, $369 billion in public debt and $40 billion in structured products such as asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). -backed and mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral.
-backed securities.

Seeking maximum income from the securities they hold on other companies they tend towards higher risks in companies that are in more fragile situations trying to draw in funds by offering greater returns, and thus expanding the credit risk market.

As interest rates climb the value of corporative debt sinks. The greater the share of sinking corporate debt in a company’s assets, the greater the negative impact on the corporate balance sheet. The corporate equity value sinks too and may get to a point where it no longer covers its obligations. In 2016 Apple informed US authorities that in the case of a 1% increase in interest rates it would lose $4,.9 billion. |5| Of course, just like other companies Apple borrowed to finance its debt purchases. In 2017 Apple has already borrowed $28 billion, bringing the total to $75 billion. This, by domino effect, could produce a crisis of similar ampler to that of the US financial crisis in 2007-2008.

The situation described here illustrates a new step in the financialization of Capitalism: The big non-financial corporations continue to develop their financial investments. The financial departments of Apple, Oracle, General Electric, Pfizer, Ford or General Motors grow and take ever greater risks seeking ever greater profits. Whereas, previously they lent 60% of their investment capacity to intermediaries such as money market funds MMF
Money Market Funds
Mutual investment funds that invest in securities, including money funds.
, they now only grant them 50% and prefer, with the other 50%, to act for their own account. As well as increasing their profits they also increase the risks they take.

What is more, a large part of the debt held on other companies is darkly processed through tax havens, which further increases the risk. The Bermudas and Ireland are among the principal tax havens used by big US Corporations seeking to “optimize” legal tax evasion.

This mountain of corporate private debt will be a prime element in the next financial crisis. But, crisis or no crisis, these capitalist practises in themselves are full justification for the actions of all who struggle for the end of Capitalism and of the debt system.

Translation by Mike Krolikowski and Christine Pagnoulle


|1| Financial Times, “Return of the buyback extends US rally”, 5 December 2014.

|2| Financial Times, “Buyback outlook darkens for US stocks”, 22 June 2017.

|3| Les Echos, 18 January 2017. See (in French)

|4| Financial Times, “Debt collectors”, 16-17 September 2017.

|5| Financial Times, “Patchy disclosure gives investors little to chew on”, 28 September 2017.


Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France. He is the author of Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc. See his bibliography: He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. Since the 4th April 2015 he is the scientific coordinator of the Greek Truth Commission on Public Debt.



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