The heavy hand of past borrowings continues to hang over us. China’s explosion of debt is worrisome. The bad loans being carried by European banks may be a factor restraining the willingness to lend. The IMF and the EU are still at odds over the sustainability of Greek debt.
Meanwhile, data released yesterday showed that household debt in the US surpassed the pre-crisis peak in Q1 (to ~$12.7 trillion). Arrears sharply lower than before, with the notable exception of student loans. Also, there has been some recent slippage on credit cards and vehicle loans.
The way in which debt is addressed shapes the subsequent expansion. What happened to the US shale industry may offer insight that can be applied more broadly. This is not some plea about forbearance or forgiveness. It is about capital markets and the legal system.
Here is the quick backstory: Shale was booming on the back of high oil prices and financed on debt. When oil prices fell, the debt proved onerous. Almost 115 exploration and production (E&P) businesses were driven into bankruptcy in 2015-2016. The Financial Times recently reported that eight of the 10 largest have emerged from bankruptcy and are operating.
These shale companies have cut billions of dollars of debt. They have stronger balance sheets than before. Output was cut, but it appears to have bottomed and begun growing again. Often the companies retained their management. Some of the assets (fields) that had to be liquidated are in stronger (better capitalized) hands.
This limits the impact of bankruptcy on rationalizing an industry by getting rid of capacity and inefficient (high cost) producers. The industry itself appears to be going in a powerful upswing of technological advances and innovations that have seen costs continue to fall. There is an important lesson in there for OPEC’s efforts to drive out US shale production.
US bankruptcy law may be lenient compared with other major countries. Culturally, the US also seems to have de-stigmatized business failures. Often those who fail try again.
