The European markets corporate debt are “duped” by the monetary incentives of the central banks and the volume of aggressive transactions is dangerously close to excessive levels reached before the financial crisis, warns in a report credit rating agency Standard & Poor’s (S&P).
The artificial downed interest rates not only promote inefficient allocation of capital, but also encourage excessive speculation in financial markets that could ultimately cause more harm than good when the boom is turned into a collapse, commented the analysts from S&P.
The agency concerns revolve around whether the companies capitalize on the issue of whether cheap debt and use it in the most effective manner. S&P believes that business confidence in Europe remains low, causing companies to issue more debt at record low interest rates than funds invested in capital investment. Because firms choose to borrow rather than invest, the central bank can not produce self-sustaining recovery in the region. Instead, as Europe and USA show upward trends in the volume of mergers and acquisitions, increased debt issuance and growth buyouts financed by credit. This indicates a decline of market discipline that increasingly rely on financial engineering to generate returns instead of economic growth.
The outlook for European markets is still very dark and much worse than the one in USA. The warnings from S&P does not prevent it from issuing more elevated scores than decreased in the corporate sector. In June, the agency warned that corporate debt in the Asia-Pacific region will exceed the total of such North America and Europe by 2016.