Over The Ears in Debt

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One of the major forces fueling the accumulation of foreign debt, the economists noted, is the persistence of large U.S. budget deficits, which have increased consumer income and stimulated demand for imports. Between 1980 and 1986 those deficits added more than $1 trillion to the national debt, bringing the total to a horrifying $2.1 trillion -- most of which, however, is still owed to Americans rather than foreigners. The chief hope for constraining the deficit has been the Gramm-Rudman law. The measure has led Congress to reduce the projected 1987 budget deficit to $173 billion, some $48 billion below last year's level. To meet next year's Gramm-Rudman target of $108 billion, Congress would need to cut about $65 billion more. But the Democratic chairmen of both the Senate and House budget committees last week declared that the Gramm-Rudman target would be impossible to meet. Their comments suggested that Congress may vote to amend the Gramm-Rudman goals.

A weakening of budget-cutting resolve could have dire consequences. Currently, noted Board Member Alice Rivlin, director of economic studies at Washington's Brookings Institution and a former head of the Congressional Budget Office, "we are using more than two-thirds of our net national savings to finance the Government." Were it not for a heavy influx of foreign capital, American businesses would have a tough time competing with the Government for scarce funds in the credit markets. If the foreign money flow slows down substantially, the budget deficit could drive up interest rates.

That could mean major trouble for American companies, which have amassed a huge debt load in comparison with the amount of stock they have outstanding. Between 1980 and 1986 the debt of nonfinancial corporations rose 35%, from $891 billion to $1.2 trillion. Many of those loans resulted from the takeover wave of recent years. While some companies borrowed heavily to make acquisitions, others went deep into debt to preserve their independence by buying up their own stock. A growing proportion of the debt is in the form of high-interest junk bonds, which may be especially risky in the event of recession.

Many companies are in danger of becoming overleveraged. Said Alan Greenspan, a New York City-based consultant: "There is a very substantial segment of corporate America that is borrowing to pay interest." At the moment, the weight of corporate debt is being lightened by the prolonged bull market on Wall Street, which has sent the value of companies' stocks to new heights. But the gains could easily prove ephemeral. Said Greenspan: "Any stock-market break can create some very severe financial problems."

A special guest at last week's TIME meeting was somewhat more optimistic. Kathleen Cooper, senior vice president and chief economist at Los Angeles' Security Pacific National Bank, pointed out that while corporate debt in relation to companies' income has been rising in recent years, that ratio was just as high around 1970. Many corporations, she said, are swapping short-term debt for long-term obligations to take advantage of current low interest rates and protect themselves against sudden changes in the economic climate. Said Cooper: "I don't think it's nearly as scary now as many people think it is."