“Don’t Panic”: An Economist’s Take on the Debt Maturity Wall
Navigating the debt maturity wall while avoiding refinancing risk
This issue of ThinkSet magazine addresses the debt maturity wall from a variety of angles, including borrowers, lenders, and key industry sectors. It’s only right, then, that we hear an economist’s perspective.
A financial economist and econometrician, Dr. Albert Metz is a securities and finance expert with over two decades of experience in event studies, credit analysis, asset pricing, market efficiency, and damages. He’s also a managing director with BRG’s Economics & Damages community.
We sat down with Dr. Metz to get his view on the debt wall, the impact of policymakers, how firms can prepare, and the year ahead.
What are the implications of the upcoming debt maturity wall on liquidity and refinancing risks in the financial markets?
There is always a debt maturity wall in front of us—always. And it is (basically) always managed. It is something like the observation that most homes have only about two weeks of food in the pantry. But they keep going to the store and replenishing the pantry, so they will still have about two weeks of food.
Now, interest rates are higher, so there may be some pressure on low-cash-flow/high-leverage businesses, which must roll over lower-rate debt for higher-rate debt. Some firms will be prepared; others may be less so.
How can policymakers mitigate the potential systemic risks associated with a large volume of corporate and sovereign debt maturing simultaneously?
I don’t see a role for policymakers. Any attempt at more “quantitative easing” to alleviate immediate pressure likely will exacerbate inflationary pressures and put upward pressure on interest rates. Policymakers can never make costs go away. Sometimes they can shift today’s costs onto tomorrow, but this usually comes at a price.
Which strategies should central banks consider to support orderly refinancing and avoid market disruptions during periods of heightened debt maturities?
I don’t have any concern that markets, left alone, will not function as they should and permit appropriately priced debt refinancing. Some firms may struggle, but that happens from time to time.
How does the composition of debt (e.g., short- versus long-term) affect economic stability during a period like this?
Most businesses have financial officers who are striking a proper balance, hopefully, between short- and long-term debt. Firms that took advantage of low interest rates to lock in long-term, low-rate debt will have an advantage.
Unfortunately, the balance sheet of the US government (which of course is massive) is impacted more by politics than by prudent financial decisions. That favors holding excessive short-term debt, which is almost always less expensive than long-term debt.
What do you anticipate the situation with regard to the maturity wall will be over the next year to eighteen months? Will any critical events (e.g., the US elections) have an outsized impact?
The wall will be pushed out, as it always is, as firms refinance. How far out may reflect interest-rate expectations. If there is an expectation that rates will fall, firms may prefer to issue shorter-term debt so they can refinance in more favorable conditions. If there is an expectation that rates will remain high (or go higher), then smart firms will lock in longer-term debt, even at current rates.
Interest rates and inflation are impacted by fiscal policy. One can hope for greater fiscal discipline, but I don’t know that one should expect it—regardless of the election outcome.
Can we learn any lessons learned from previous debt maturity walls?
I would submit that the lesson to be learned is: Don’t panic. This is not unusual.
Albert Metz is a managing director with BRG’s Economics and Damages community based in New York City. He is a securities and finance expert with experience in event studies, credit analysis, asset pricing, market efficiency, and damages.
Email: ametz@thinkbrg.com
Phone: 646.517.0463