Economy

'Stakes are high' for the financial system to address rising corporate debt, Barclays CEO warns

Key Points
  • The International Monetary Fund (IMF) earlier this month escalated its warnings about high levels of risky corporate debt, which have been exacerbated by persistent low interest rates from central banks.
  • The IMF warned that almost 40%, or around $19 trillion, of the corporate debt in major economies was at risk of default in the event of another global economic downturn.

Barclays CEO Jes Staley warned that "the stakes are high" in tackling rising corporate debt and avoiding another financial crisis.

The International Monetary Fund (IMF) earlier this month escalated its warnings about high levels of risky corporate debt, which have been exacerbated by persistent low interest rates from central banks.

"Easy financial conditions have extended the corporate credit cycle, with further financial risk-taking by firms and continued build-up of debt. Corporate sector vulnerabilities are already elevated in several systemically important economies, reflecting rising debt and often weak debt service capacity," the IMF's Global Financial Stability Report said.

"Lower-for-longer yields may prompt institutional investors to seek riskier and more illiquid investments to earn their targeted return."

The U.S. Federal Reserve has cut rates twice this year, while the European Central Bank has kept interest rates negative and introduced a massive stimulus package.

The IMF warned that almost 40%, or around $19 trillion, of the corporate debt in major economies such as the U.S., China, Japan, Germany, Britain, France, Italy and Spain was at risk of default in the event of another global economic downturn.

Barclays CEO: 'Low interest rates pose a number of challenges'
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Barclays CEO: 'Low interest rates pose a number of challenges'

Speaking to CNBC's "Squawk Box Europe" following Barclays' third-quarter earnings report on Friday, Staley said financial crises usually arise from financial factors which are "actually quite obvious but are just misread."

"The financial crisis of 2008 was about AAA securities and the market believing that they posed no risk, the financial crisis of 2009 was the acceptance that a euro zone sovereign was a euro zone risk, and that didn't turn about to be right. So there's always something out there that I always think that we need to take a different look at to see what might be the next issue," he said.

Staley suggested that a break of liquidity in a particular credit market is often the trigger to serious global financial trouble, but said the banks are in a stronger position than ever in terms of capital and liquidity, meaning they are unlikely to be at the epicenter this time around.

"Getting this whole issue of liquidity and risk fine-tuned, given the amount of sovereign and corporate debt that's out there — the stakes are high," he added.

In a note Thursday, Algebris Head of Macro Strategies Alberto Gallo also said that banks are more resilient this time around, but highlighted that "leverage has grown across corporate balance sheets."

"Many investment funds have bought into the same trades, some reaching for yield in less liquid assets," he explained.

"Policymakers are increasingly concerned about long-term fundamentals across corporates and certain emerging market sovereigns. They admit global manufacturing is in recession: the fear is a potential spill-over to other sectors."