As the world grapples the destructive forces of Covid-19, fears that it will accelerate a global economic recession have been rapidly heightened. The coronavirus has been shutting down businesses, quarantining workers and halting international travel at a level never seen before. Global policy makers are scrambling to ease the public's anxiety over the pandemic health crisis, all the while attempting to deal practical fiscal policies against a backdrop of already dire economic slowdowns and recession scares.

The virus has plummeted global growth predictions to just 1.5%, down from the (pre-virus) projection of 3%, according to the Organisation for Economic Cooperation and Development (OECD). Add to the equation historic levels of corporate debt and the effects of an economic downturn will become severely amplified.

Indeed, with the world's most advanced economies struggling to keep afloat and flirting dangerously close with a recession, analysts are keeping a close eye on the colossal stack of corporate debt that has been building up over the past decade. The current crisis could very well be the trigger which bursts the huge debt bubble inflated by years of ultra-low interest rates and quantitative easing measures.

Corporate debt has risen exponentially over the past decade. According to the OECD's 2019 Report, the global outstanding debt in the form of corporate bonds reached almost USD13 trillion at the end of 2018 - twice the amount outstanding in real terms in 2008. The United States occupies the largest market for corporate bonds, while the Chinese corporate bond market has witnessed the most dramatic jump in corporate bond issuance, now ranking second highest in the world. Low interest rates encouraged through regulatory initiatives aimed at "stimulating the use of corporate bonds as a viable source of long-term funding" post 2008-crisis had supported this trend, enticing companies to borrow without threat.

But of course, delving into dangerous levels of debt can never be sustainable. Debt bubbles fuelled by artificially low interest rates and cheap money will more than likely burst and the coronavirus is excellently placed to be the pin which pricks this particular bubble.

It is exceedingly clear many businesses, and even sectors, will not be able to survive this pandemic. Concerns of businesses being unable to make bond payments are a prevailing and critical fear for investors, particularly for those in or related to the airline, energy and hospitality sectors.

Prospects of little to no revenue over the coming months (or perhaps longer) for such particularly exposed sectors are especially troublesome. With plummeting levels of creditworthiness, many corporations will no longer be able to merely roll over debt and borrow more money cheaply. Rather, with a global market stifled at record levels, the estimated 2 trillion US dollar debt due to roll over this year has nowhere to be absorbed, therefore setting out plainly some of the fundamental cracks in the system. Indeed, the coronavirus pandemic has done a remarkable job at exposing the inherent vulnerabilities of a financial system based on longstanding imbalances.

The real consequences of the corporate debt crisis are already being seen. Mass lay-offs of employees can already be observed in the most exposed sectors as companies, facing grave debt burdens, are forced to scrap costs in a desperate attempt to avoid default. The US Treasury has predicted unemployment could rise to 20%, with similar trends likely in Europe and the Asia-Pacific areas - causing a massive collapse in demand, surge in bankruptcies and amplification of the recessionary downward spiral. Fears of whether banks are strong enough to withstand the coronavirus crash also persist. Supply-chain disruptions and enforced social-distancing measures exacerbate risks of mass loan defaulting, especially in economies which remain incapacitated for an extended period of time. 

Naturally, not all corporate debt is of equal risk. While the energy, tourism and hospitality, retail and traditional entertainment sectors (among others) are clearly at greatest risk, those in the business of e-commerce, pharmaceuticals, online entertainment or logistics and delivery are bound to thrive in the opportunities the pandemic presents.

Nonetheless, with key industries withering and public resources put to the limit, the perilous burden of corporate debt that has accumulated over the past decade will no doubt present a formidable challenge for policymakers around the world struggling to deal with a health crisis offering little end in sight. The vulnerability of the corporate debt market has been mounting for over a decade. Piles of corporate debt and its ensuing creditworthiness downgrades and a wave of defaults will undoubtedly amplify the next recession as those businesses most requiring funding are shut off from the necessary funds. Considering the evolution of the pandemic in Malta, a total lockdown at some point is inevitable. No wonder, the evening news is so depressing when it reports new growth in global corona victims and the daily mortality rates. Globally, more than 400,000 declared cases of Covid-19 have been registered in 174 countries and territories while countries are starting to coordinate to help each other fight the virus as we notice how Cuba and China have sent doctors to Italy, while some Italian patients have been transferred to hospitals in Germany.

Effectively, commerce in Malta is paralysed, particularly the hotel and travel industry which is reeling under the strain of zero business and no wonder layoffs are expected when for example, media reports that the car hire industry has more than 7,000 vehicles lying idle and another 700 brand new ones that have just been imported but are still unlicensed due to the Covid-19 pandemic. A mini-budget, as revised by the prime minister, reaffirmed that the amount of cash subsidy to firms resisting layoffs matches minimum wage rates.  He said tourism will suffer a loss of €2bn adding that Malta will "be lucky" to see tourists by December of this year. This is a sector which will be the hardest hit and whose fall-out will affect 110,000 workers, almost a quarter of the population.

This is all truly depressing while thousands of white collar workers cocooned at home (occasionally both husband and wife plus children) are trying their best to work offline. The mini-budget aims to ratchet up debt to reach 50% of GDP and inject €70m monthly in wage subsidies. One hopes that the incidence of debt on a global scale will slowly start to de-escalate once an effective vaccine is found that will sever the head of this unwelcome Medusa.     

Elysia Rezki is a Junior Legal Associate at PKF Malta