In the last week the news has emerged that the major British and European banks are aggressively arranging highly risky American corporate debt in an effort to increase their slumping bottom lines in other divisions. This has caused some economists and market observers to worry that they are fueling another borrowing craze like the one that brought down the world economy during the Global Financial Crisis from 2007-2009. The Bank of England calls it a significant risk to maintaining global financial stability.
These specters from a decade ago are a warning to you that you can not leave the fate of your investment and retirement portfolios to the whims of the banks and markets. Global debt has just hit an all time high as well. It is why you need a gold IRA. Now is the time to seriously research and ponder what gold goes in an IRA before the world economy finds itself in a rerun of the Great Recession. Gold offers insurance and protection during market turbulence.
U.S. Market for Leveraged Loans Skyrocketing
The European banks have been desperately searching for a way to stay competitive with their American rivals since the end of the last financial crisis. Unfortunately, what they have found to offset slumping revenues in other core businesses is a high risk venture. British and European banks have poured literally tens of billions in dollars into loans to high-risk clients in the United States.
This makes them more competitive versus their American counterparts, but it has an unintended side effect. By offering easier credit evaluations as a consequence of being aggressive, they are boosting the amount of money that risky corporate borrowers are able to obtain. Observers and even bankers have worried that these corporations are now taking on more debt than they can afford, endangering not only the companies and the banks, but the entire financial system ultimately.
Co-Chief Investment Officer Michael Barnes of Tricadia Capital Management, LLC based in New York warned that:
“This gain in market share appears to result from European banks’ willingness to stretch even further on leverage levels, structure, and pricing. As is typical of all credit cycles, it is a race to the bottom.”
The roaring American market for highly leveraged loans is fueling acquisitions and dividend payments to private equity that own a number of them. Yet it is also creating unsustainable situations for corporations that are already highly leveraged and in debt. Just in 2017, banks and financial companies arranged $494 billion in brand new debt.
It represented the highest amount going back to 2011 at least. This is the equivalent of Poland’s entire gross domestic product for a year. Bloomberg-compiled data reveals that these banks are set to deliver an even higher amount for 2018. The biggest banks in Europe and the United Kingdom will not be outdone by their American counterparts.
Eight of the European and British banks have participated in a substantial $62 billion worth of newly leveraged American loans in only the first six months of 2018 versus $53 billion in the prior year. It means that they have grown their market share altogether to nearly 24 percent of the entire American leveraged debt market. This means that 76 percent is held by mostly American banks though. When the next financial crisis or economic slowdown inevitably hits and these loans go bad, there will be plenty of pain to go around in both the New World and the Old World.
Barclays and Credit Suisse Lead the Dangerous Charge
Barclays Bank of Britain is the European leader in this offensive to take over the U.S. risky leveraged loan market. Its CEO Jes Staley has been going after the category of leveraged finance (particularly in the U.S.) actively since 2015. He sees it as an ideal opportunity to grow revenue and increase profits.
As the owner of the former Lehman Brothers U.S. investment bank, they are ideally suited to build on this American market presence and expertise. Now Barclays owns over six percent of the entire market of new highly leveraged loans. This should see them take the third largest leveraged loan lender spot by the end of 2018. It would be a five year market share high for the British bank.
Barclays spokesman Jon Laycock tried to dispel fears that this is a potential disaster in the making with his statement that:
“Barclays operates in compliance with the rigorous leverage finance guidance provided by the regulators. In addition, we have a thorough internal credit risk process and we always ensure that we allocate our balance sheet to drive the best outcomes for both our clients and our shareholders.”
This chart below shows how the eight largest European and British participants in this risky business stack up relative to each other:
The largest European rival to Barclays in this American arena is Credit Suisse Group AG. They have boosted their hiring efforts for leveraged finance, believing that this high-flying growth will go on for the foreseeable future.
The third largest contender from Europe is Deutsche Bank. They have fired literally thousands of their employees and withdrawn from many American business ventures altogether. The bank’s CEO Christian Sewing is attempting to extend their efforts to offer a greater number and amount of leveraged loans. To this effect, they have begun courting the private equity firms based in the U.S. that own a large percentage of the borrowers that are not investment grade level. The bank is also increasing funds set aside for these mega deals.
The biggest bank in Britain and Europe HSBC Holdings is also quietly increasing its number of American-based private equity clientele in an effort to increase the size of this profitable business. This has helped it to grow its share of the lucrative but risky market alongside peers French BNP Paribas, Swiss UBS Group, French Credit Agricole, and Dutch ING Groep. As an example, the Paris-headquartered Credit Agricole booked $2.3 billion worth of new American leveraged loans for only the first half of 2018. This was nearly equal to its entire risky leveraged loans efforts in the whole of year 2017.
Meanwhile Global Debt Reaches A New All-Time High
Meanwhile, as the world’s major banks are chasing highly risky American leveraged loans to sub-prime corporations, global debt in general is rapidly rising. For Q1 of 2018, total worldwide debt touched $247 trillion, per the IIF Institute of International Finance report from last Wednesday. The non-banking segment made up $186 trillion of this total.
It brings the global debt to GDP ratio figure to more than 318 percent. This represents the first rise for the quarter dating back two years. Contributing to the dangerous totals are all-time high amounts of household and corporate debts in a number of leading developed markets.
Gold Is Your Best Line of Defense Against High Risk and Rising Debt Loads
You would think that only a decade after the largest financial and economic meltdown around the world since the Great Depression of the 1930’s and 1940’s that the banks would have learned their lesson. Obviously they have not. A return to the dangerous forms of lending endangers not only the financial system of the world in general, but also the national economies in places like the United States and Europe. It is risky American loans that are being created for U.S. corporations in the end.
This is a very relevant matter for you. Not only are stock markets at risk from this activity, but so are the banks that hold your savings and financial reserves. It explains why you should invest in gold. All that remains is for you to figure out how to invest in gold.