Higher for longer interest rate environment squeezing more borrowers – IMF

International Monetary Fund (IMF) says the ability of individuals and business borrowers to service their debt is diminishing due to higher for longer interest rate.

According to the Fund in its Global Financial Stability Report making debt more expensive is an intended consequence of tightening monetary policy to contain inflation.

“The risk, however, is that borrowers might already be in precarious positions financially, and the higher interest rates could amplify these fragilities, leading to a surge of defaults,” it said.

The Bretton Woods Institute noted that many businesses suffered closures during the pandemic, and others emerged with healthy cash buffers thanks in part to fiscal support in many countries.

However, the lender pointed out that many firms were able to protect their profit margins even though inflation had picked up saying that in a higher-for-longer world, however, many firms are drawing down cash buffers as earnings moderate and debt servicing costs rise.

“Indeed, the GFSR shows increasing shares of small and mid-sized firms in both advanced and emerging market economies with barely enough cash to pay their interest expenses. And defaults are on the rise in the leveraged loan market, where financially weaker firms borrow. These troubles are likely going to worsen in the coming year as more than $5.5 trillion of corporate debt comes due.

“Households too have been drawing down their buffers. Excess savings in advanced economies have steadily declined from peak levels early last year that were equal to 4 percent to 8 percent of gross domestic product. There are also signs of rising delinquencies in credit cards and auto loans.

“Headwinds also confront real estate. Home mortgages, typically the largest category of household borrowing, now carry much higher interest rates than just a year ago, eroding savings and weighing on housing markets. Countries with predominantly floating rate mortgages have generally experienced larger home price declines as higher interest rates translate more quickly into mortgage payment difficulties. Commercial real estate faces similar strains as higher interest rates have resulted in funding sources drying up, transactions slowing, and defaults rising,” the Fund said.