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Wave Of Corporate Defaults Could Be Coming, Financial Watchdog Warns 

February 1, 2016

Owen Davis, International Business Times

A financial watchdog set off the alarm bells on corporate debt Wednesday in its annual report to Congress. With companies feeling growing pressure from painful exchange rates and energy prices, the U.S. is at a higher risk of seeing a wave of corporate defaults, the report said. 

The report from the Office of Financial Research, a division of the Treasury Department, listed credit risk as one of the top three financial stability dangers facing the economy in 2016. 

The combination of slowing global growth and plunging energy and commodities prices, the report said, "has diminished the ability of multinational companies and firms in the energy and commodity industries to repay their debts."

After years of issuing bonds at historically low interest rates — due to the Federal Reserve's historically low interest rates following the financial crisis — nonfinancial corporations now hold roughly $4.7 trillion in outstanding debt, or about 70 percent of national GDP, much of which is owned by institutional investors like pension funds and insurance companies.

But in recent months corporate profits have begun to dip, imperiling some companies' abilities to make regular bond payments. Together, the report said, those factors "are hallmarks of the late stage of the credit cycle, which typically precedes a rise in default rates." Read more

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