Weak Wall Street – Difficulties in Raising Cash
The economy is shriveling up at the wrong time, and it’s having effects on the markets that we haven’t seen since the US was stepping out of the Great Recession. We’ve seen companies adjust to the current economic climate by laying off workers, but it’s what companies haven’t been doing that has caught the eye of some in the economy.
Activity in the capital markets has fallen to the lowest level since 2011 according to Dealogic, and this includes methods to raise funding including mergers and acquisitions and stock sales. A big cause of this is the rise in interest rates, which is not only affecting the decision to borrow, but the money that is already borrowed. The Wall Street Journal tells us that North American companies would need to produce at least $200 billion in the next 2 years to keep up with rising interest payments, and this is serving as a major roadblock for companies to raise cash. Things that were once red hot like IPOs and M&A are now non-existent, with IPOs in October declining by 95 percent from the previous year. Risks of defaulting are plaguing companies, and this worries the banks who have instituted these loans too. Banks who lend these leveraged buyouts are now paying the price by having to take losses and raise debt. This whole situation is creating what economists are calling a “credit crunch,” where credit ratings of these loans will be downgraded, and corporations start to default. Unfortunately, the situation could darken as defaulted debt could reach almost half a trillion dollars, which is double the peak from the Great Recession.
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I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.