Borrowing by businesses is historically high relative to gross domestic product (GDP), with the most rapid increases in debt concentrated among the riskiest firms amid weak credit standards.

Coronavirus represents a threat that has to date received little publicity. That is, American corporations have borrowed trillions of dollars over the past decade that they will be unable to repay. According to a publication by S&P Global Market Intelligence, $4.1 trillion worth of corporate debt will mature in 2020. Much of this debt will not be able to be refinanced, leading to the prospect of widespread bankruptcies.

Ruchir Sharma, chief global strategist of Morgan Stanley, recently wrote an editorial for the New York Times, “This is How the Coronavirus will Destroy the Economy.” He wrote that “the coronavirus threatens to set off a financial contagion in the world economy.”

Sharma exposed the following negative scenarios:

The risky pools have shifted from households and banks to corporations. The amount of corporate debt represents 75% of the country’s domestic product, far beyond the levels in 2008. Debt burdens are particularly high in the auto, hospitality, mining, oil and transportation sectors. One in six U.S. firms does not have the cash flow to cover their own interest payments. The companies, called “zombies,” earn too little to make interest payments on their debt and survive only by issuing new debt. According to the Bank for International Settlements, “zombies” represent 16% of all publicly traded companies in the United States and more than 10% of the debt in Europe. Sharma expects that a sharp downturn in the U.S. economy will start a chain of defaults just like the subprime mortgages did in 2008.

Unfortunately, the proliferation of irresponsible debt isvsuance was a global phenomenon. According to the Organization for Economic Cooperation and development, debt among corporations around the world increased to $13.5 trillion at the end of 2019 — a global debt burden that is an all-time high.

In recent weeks, investors have begun to shun in particular lower-quality obligations. The interest rate of corporate debt vs. government debt has widened to spreads comparable that we witnessed during the 2008 financial crisis. When the yield on corporate debt rises, their prices decline. For example, the price of the Pimco High Income Fund (PHK) has declined close to 50% from its high on April 1, 2019.

The recent response by the Federal Reserve Bank reflected that we are facing a cash crunch. The subsequent price decline in the stock market underscored investor concerns that the actions by the Fed will not be enough to prevent a panic.

In essence, we have two sets of problems that are intertwined. That is, events on Main Street impact Wall Street and vice versa. When the stock market declines by 30%, everyone becomes cautious and cuts back on spending. The coronavirus epidemic has added to this problem because we are frightened to frequent restaurants, theaters, shopping centers, stores, etc. Thus, the economy slows and layoffs inevitably follow. The problem is particularly acute because markets have become much bigger over the past 40 years. Since 1980, the global financial markets (mainly stocks and bonds) have quadrupled to four times the size of the global economy.

I spent 35 years on Wall Street, mostly involved in corporate bonds. I witnessed a distressing phenomenon. Our economy has imbibed on a diet of debt financing. Some 15.8% of total corporate bonds are now junk bonds, up from near zero when I started in 1969. In addition, about half of investment-grade debt outstanding is currently rated triple-B. In brief, the coronavirus will expose our financial vulnerabilities. That is, companies do not have the financial resources to weather our upcoming recession.

Originally published in the Sarasota Herald-Tribune