A growing corporate solvency crisis

Companies around the world are increasingly at risk of failure, and the size of the problem is growing.

Driving the news: That's the message being delivered by two of the world's most respected monetary authorities — former European Central Bank president Mario Draghi and former Reserve Bank of India governor Raghuram Rajan — and a flurry of other top economists.

What's happening: "There is a growing corporate solvency crisis in most of the world, as balance sheets are hit hard by losses and the resulting need to pile up debt," co-chairs Draghi and Rajan, along with a group of economists, academics and central bankers that includes former chair of the Council of Economic Advisers Jason Furman and People's Bank of China governor Yi Gang, wrote in a report for the Group of 30 (G30).

• "In addition, many companies entered the coronavirus recession with unusually high levels of leverage."

Between the lines: Further, the actions taken by central banks and governments in response to the coronavirus pandemic are masking the true state of the economy — a disguise that cannot last forever.

What we're hearing: While central banks could continue to pump money through the financial system for a long time, businesses can't survive on liquidity alone, Draghi told Axios during a meeting with reporters Friday.

• "You can do a certain amount of what’s called evergreening but after a while the corporation will remain unviable no matter how big is the liquidity support."
• "At this point in time the next issue we’ve got to be worried about is a surge in nonperforming loans all over the banking system in most parts of the world."

One level deeper: Unlike central bank support, which will be in place for quite some time, the massive fiscal support packages from governments will have to come to an end, Rajan told Axios during the meeting.

• At that point, businesses will start failing and questions will need to be answered about not just the firms that go under, but about the firms that are connected to them, as well as banks and individuals.

The bottom line: "We’re not yet out of the pandemic but we should start preparing for what comes next," Rajan said.

• "And what comes next are the consequences of the tremendous amount of support that we have in place."

A crisis with no end in sight

Draghi, who famously said the ECB would do "whatever it takes" to support the eurozone economy back in 2012, believes central banks have no alternative but to continue to keep rates low and keep printing incredible amounts of money.

• "Support, in my view, will continue for quite a long time," he told Axios during the Friday meeting.

The big picture: "Originally, some people said this is going to be a V-shaped recession. This is not a V-shaped recession, this is a long recession."

The big question: "For fiscal authorities almost everywhere ... we are in a period of time where new [spending] programs succeed old programs without any break, and bigger and bigger numbers come every day."

• "The main issue is how do you design these programs, how well do you spend this money because ultimately growth will depend on that. In many countries, only on that."

Editor's note: This story has been edited to state that Raghuram Rajan was the governor of the Reserve Bank of India, not the Bank of India.