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A debt binge has left a quarter of US corporate assets vulnerable to a sudden increase in interest rates with the ability of companies to cover their interest payments at its weakest since the financial crisis by one measure, the International Monetary Fund has warned.

The warning in the IMF’s twice-yearly Global Financial Stability Report highlights one of the main potential risks facing Donald Trump and his plans to boost US growth through a combination of tax cuts and infrastructure spending.

Although the details of Republican plans are far from finalised, the IMF’s assumption is that tax cuts will end up adding to both the country’s deficit and the US debt load, predicting it would be as much as 11 percentage points of GDP larger in five years than they forecast a year ago.

But it is the potential impact of those plans on borrowing costs and companies that the IMF also finds concerning.

Mr Trump’s hope is that lower taxes and a reduced regulatory burden will cause companies to increase investment and hire more workers in the US, leading to stronger growth.

The IMF said there was also another possible scenario in which the new administration’s fiscal plans turned out to be economically “unproductive”.

Should Mr Trump’s plans lead to larger US budget deficits and higher inflation it would force the Federal Reserve to raise rates faster than expected. That could lead to a rapid appreciation in the dollar and consequences for emerging economies.

But it would also hit the borrowing costs of US companies, which according to the IMF have loaded $7.8tn in debt and other liabilities since 2010.

The problem, according to fund economists, is that “corporate credit fundamentals [in the US] have started to weaken, creating conditions that have historically preceded a credit cycle downturn”.

By the IMF’s calculations, companies with almost $4tn in assets – or 22 per cent of the total US corporate assets – would be “weak” or “vulnerable” to a fiscal expansion that went wrong and led to a sharp rise in borrowing costs.

While the absolute level of debt servicing costs as a proportion of income was now low compared to during the global financial crisis other measures were less encouraging.

The average interest coverage ratio had fallen sharply over the past two years, the IMF said, with earnings less than six times the cost of interest, a figure “close to the weakest multiple since the onset of the global financial crisis”.

That sort of deterioration has historically corresponded with widening credit spreads for risky corporate debt and been concentrated on smaller firms with less access to capital markets.

But, already, the IMF said, firms accounting for 10 per cent of US corporate assets appear unable to cover the cost of interest out of their current earnings.

Many of those firms are in the energy sector and suffering due to the oil price volatility of recent years. “But the proportion of challenged firms has broadened across such other industries as real estate and utilities,” IMF economists wrote.

Charts via IMF

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