Interest Rate Rise: Turning Point Looms for US Debt Binge

The world has become accustomed to low-cost loans since late 2007 and many dread a hike in interest rates by the US Federal Reserve. Low interest rates encouraged corporate borrowing and speculation, weakening some firms. “Companies have had easy access to cash to write cheques for multibillion-dollar takeovers, to fund buybacks and dividend strategies – all welcomed by investors as share prices rallied off 2009 lows,” reports Eric Platt for the Financial Times. “Moody’s and S&P warn that defaults are likely to increase in the coming years as interest rates rise, a concern echoed by bond funds such as Pimco.” Energy firms with heavy debt, while confronting low commodity prices and a slowdown in China, as well as pharmaceutical and health-care firms could be most vulnerable. The World Bank and the International Monetary Fund have urged US central bankers to delay raising rates, with the World Bank’s chief economist warning about “panic and turmoil,” particularly for the world’s emerging markets. Some analysts contend a rate hike could herald an era of more responsible borrowing. – YaleGlobal