This matters for everyone because heavily indebted companies are more vulnerable when the economy stumbles: “Such corporates are likely to reduce investment and employment, which could further exacerbate an economic downturn,” the FSB said.

How did we get here?

It seems a little crazy to be talking about financial engineering and risky debt just a little over 10 years since the last credit crisis featured both prominently. In part, this is because of central banks. The US Federal Reserve and European Central Bank have taken unprecedented steps to reduce interest rates, forcing investors, from hedge funds in London to retirees in Iowa, to take ever more risk to get an adequate return.

There are finally signs in some economies that prospects for middle-class workers, hard hit by the last economic plunge, are getting brighter. Policymakers in Washington and Brussels have been wary of doing anything that could cool the economy when a tighter labor market is putting more money in many workers’ pockets.

Ten-year US government bonds yield less than 2%, while the equivalent German yields are negative. Around $15 trillion of bonds have negative yields, according to the IMF. Investors have resorted to taking on ever more risk, which has enabled a lot of questionable behavior.

In the leveraged loan market, that behavior includes a buyout spree which could culminate with the biggest buyout in history: private equity firm KKR could find a way to take pharmacy chain Walgreens Boots Alliance private, according to Bloomberg. The deal could be funded with more than $50 billion of junk debt.

Some private equity firms have also been heaping debt on their portfolio companies and rewarding themselves with dividends, instead of investing in these businesses, according to Moody’s Investors Service. With markets awash in money, investors are lending money while getting weaker protections, known as covenants, in return.

The global economy doesn’t have to suffer significantly for these loans to become a problem. A slowdown half as severe as the 2008 collapse could put some $19 trillion of debt at risk, meaning companies’ earnings aren’t sufficient to cover their interest expenses, according to the IMF. That’s 40% of the world’s corporate debt in major economies.

The IMF has a few suggestions on how to deal with the glut of risky bonds and loans. Right now some tax codes incentivize companies load up on debt, for example. Revised tax policies might slow this debt binge. Another key suggestion is increased transparency about the non-bank owners of leveraged loans, where regulators are often in the dark.

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