Here’s another economic problem to watch: Bad loans are rising
Investors for months have been nervously watching a number of trouble spots: China (a rapidly decelerating economy and a trade battle with the Trump administration); Britain (the Brexit soap opera); and the United States (a volatile stock market and now the partial government shutdown).
Here's another simmering problem to keep an eye on: the growing number of businesses, mainly small and midsize, that are having trouble keeping up with their bank loans. Rising interest rates make variable rate loans more expensive. Tariffs on imports of steel and aluminum are hurting cash flow at many manufacturers. Some cracks are starting to show.
“Right now, I am seeing what I think is a pickup in troubled loans that banks are dealing with,” says attorney Steven Greene, a senior partner at Riemer & Braunstein in Boston.
Greene works with lenders around the country on loans that aren't getting paid or are in danger of defaulting. As such, he and his colleagues in what is called the turnaround management field are among the first to know when debt problems are brewing. Call them canaries in the economic coal mine.
While the number of distressed loans is rising, Greene, who today was named president of the northeast chapter of the global Turnaround Management Association, doesn't see a debt crisis on the horizon. One reason: “Banks are much sounder. They learned their lessons in 2008,” he says.
That's true. But many banks have spent the past couple of years competing for loans, often accepting borrower-friendly terms that could come back to haunt them if the economy tanks. Moreover, nonbank lenders, such as private equity firms, are much bigger in the loan market than they were before the financial crisis. Since these firms don't have regulators scouring their books like banks do, a deterioration of their loan books will be hard to see.
Right now, we've got bigger things to worry about than the uptick in troubled loans. But I am going to keep in touch with Greene. If the economy does take a significant turn for the worse, he'll be among the first to know.