European corporate debt markets have become "intoxicated" by monetary stimulus from central banks and "aggressive" transactions are in danger of reaching the excesses seen before the global financial crisis, ratings agency Standard & Poor's has warned.
"Artificially low interest rates not only encourage an inefficient allocation of capital but create the incentive for excessive speculation in financial markets that ultimately risk doing more harm than good when boom turns to bust," Credit Analyst Paul Watters warned in S&P's quarterly European corporate credit outlook on Monday afternoon.
"The greater use of leverage and a growing number of aggressively structured transactions in the European leveraged finance market is reminiscent of some of the excesses of the 2006-2007 boom period."
Concerns are centered on whether the right companies are benefiting from cheaply generating debt and whether they are using it in the most productive way. S&P believes that business confidence in Europe remains low, which is pushing companies to issue more debt at record-low rates than spending money on capital investment.
Because companies are opting to borrow rather than invest, central bank policy is helpless in triggering a self-sustaining recovery in the region, the ratings agency added. Instead, S&P says that both the U.S. and Europe are showing trends of surging merger and acquisition volumes, high debt issuance and more leveraged buyouts. This points to an erosion of market discipline and a greater reliance on financial engineering to generate returns rather than fundamental growth. S&P adds that this to magnifies the risks in the financial world and says that the problems are even more pronounced in the U.S.